individual economic decision-making

Question 1

Utility:

Answer 1

Utility: the amount of satisfaction or benefit that a consumer gains from consuming a good or service.

Question 2

Rational consumer:

Answer 2

Rational consumer: an assumption of traditional economic theory that consumers act in such a way as to always maximise satisfaction, or utility, when
they spend money on goods and services.

Question 3

Marginal utility:

Answer 3

Marginal utility: the satisfaction gained from consuming an additional unit of a good or service.

Question 4

Diminishing marginal utility:

Answer 4

Diminishing marginal utility: as individuals consume more units of a good or service, the additional units give successively smaller increases in total satisfaction.

modelled on downward sloping demand curve

Question 5

how behavioural economic theory differs from traditional economic theory

Answer 5

It differs from traditional economic theory in the sense that it questions the assumption of individuals as rational decision makers.

Question 6

Bounded Rationality:

Answer 6

Bounded rationality: when people try to behave rationally but are restricted by factors such as lack of time to make decisions.

Question 6

Rules of thumb:

Answer 6

Rules of thumb: thinking shortcuts, or informed guesses, that individuals use to make decisions in order to save time and effort.

Question 7

Anchoring:

Answer 7

Anchoring: the tendency of individuals to rely on particular pieces of information when making choices between different goods and services.

• especially in situations where they lack knowledge or experience
  -may focus on the price of a car instead of its features

Question 8

Availability bias:

Answer 8

Availability bias: when people make judgements about the probability of events by recalling recent instances.
- there will be a long queue for ice creams first day of summer
- don’t gamble as someone else lost all their money

Question 9

Social norms:

Answer 9

Social norms: when individuals are influenced by others when making decisions.

• ex: peer pressure

Question 10

Altruism and fairness:

Answer 10

Altruism and fairness: individuals are motivated to do the right thing, even if this means paying more for a good or service.

Question 11

Choice architecture:

Answer 11

Choice architecture: influencing consumer choices by the way the choices are presented.

Question 12

Framing:

Answer 12

Framing: influencing consumer choices by the way words and numbers are used.
- type of choice architecture

Question 13

Nudges:

Answer 13

Nudges: influencing consumer behaviour via the use of gentle suggestions and positive reinforcement.
- type of choice architecture

Question 14

Default choice:

Answer 14

Default choice: influencing consumer behaviour by setting socially desirable choices as default options.
- type of choice architecture

Question 15

Mandated choice:

Answer 15

Mandated choice: where people are legally required to make a choice.

Question 16

Restricted choice:

Answer 16

Restricted choice: giving consumers a limited number of options when making a choice.

Question 17

restrictions of bounded rationality

Answer 17

• The human mind has limited ability to process and evaluate information.
• The available information is incomplete and often unreliable (and rapidly out of date).
• The time available to make decisions is limited.