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