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Flashcards in 2 Individual Economic Decision Marketing Deck (33):

What is the consumers aims when making economic decisions?

To maximise their utility


What is the firms aim when making economic decisions?

To maximise profits


What is a consumers utility?

The total satisfaction received from consuming a good or service


What is marginal utility?

The extra satisfaction derived from consuming one extra unit of the good


Why is the demand curve downwards sloping?

Because of the diminishing marginal utility


What does the law of diminishing marginal utility suggest?

That consumer surplus generally declines with extra units consumed because the extra unit generates less utility than the one already consumed


When current resources be misallocated?

When incentives and not given properly


What is symmetric information?

When consumers and producers have perfect market information to make their decision


What can symmetric information lead to?

And efficient allocation of resources


What is imperfect information?

When information is missing so an informed decision cannot be made


What can imperfect information lead to?

A misallocation of resources as consumers might pay too much or too little and firms might produce the incorrect amount


What is asymmetric information?

When there is unequal knowledge between consumers and producers


What can asymmetric information lead to?

Market failure or misallocation of resources


What is the principal agent problem?

When the agent makes decisions for the principal but the agent is inclined to act in their own interests rather than those of the principal


What is an example of the principal agent problem?

When shareholders and managers have different objectives which might conflict. Managers might choose to make a personal gain rather than maximising the dividends of the shareholders


How could information be made more widely available?

Through advertising or government intervention


What is Homo Economicus?

When a rational consumer is a utility maximiser and makes rational decisions


How do social norms affect how the consumer acts?

It is a social pressure that encourages consumers to do things that they would not otherwise do or that they know could be harmful, this creates a bias within the customer


What is anchoring?

A type of bias created by the human tendency to rely on the first piece of information they are given.


What is altruism?

The act of being selfless and considerate towards other people


What is availability bias?

A type of bias towards events that were recent, personal or memorable this is because they are overestimated and cause emotional responses


What is choice architecture?

The way choices are presented to consumers


How can a well designed choice architecture help customers avoid making a rational decisions and poor choices?

Because the different designs affect the choice consumers make


What is framing?

The way by which consumers are influenced by the context of how a choice is presented


What is an example of framing?

If consumers are told the monthly payments for a good or service, rather than the aggregate yearly payments, they are more likely to purchase the goods or service, since it seems more affordable


How is the context of framing made?

Through word choice and it affects the choice consumers make


What is the aim of nudges?

To change the behaviour of consumers without taking away their freedom of choice


What is an example of a nudge?

Rather than banning something like junk food, replacing it with healthier food is still a nudge. This allows consumers to make a free choice, but alters their behaviour to choose the healthy option


Why are nudges sometimes argued to be manipulative?

Because consumers still don't get a choice between them


How can nudges help prevent consumers making a rational or poor decisions?

Due to the imperfect information that exists between consumers and firms therefore welfare is maximised


What is a default choice?

When a consumer is automatically enrolled into a system, such as a pension scheme


What is a restricted choice?

when the choice of a consumer is restricted, but is still there


What is a mandated choice?

When consumers are required to state whether they wish to participate in an action. For example, in the UK everyone applies for or renews a driving license is asked if they wish to sign it for organ donation