2. Individual Economic Decison Making Flashcards
(25 cards)
What is rational behaviour?
Acting in pursuit of self - interest which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed.
What is utility?
The satisfaction or economic welfare an individual gains from consuming a good or service.
What is marginal utility?
The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service.
What is the hypothesis of diminishing marginal utility?
For a single consumer, the marginality utility derived from a good or service diminishes for each additional unit consumed.
What is asymmetric information?
When one party to a market transaction possesses less information then the other
Example of asymmetric information
Through a process known as adverse selection, asymmetric information is often used. For example, for a computer with defects, the seller will lower the price as the buyer won’t want to pay a high price for on inferior product but the seller knows more than the buyer.
Problem with assymmetric information
Used goods will sell at the same price even though some have worse defects
What is behavioural economics?
A method of economic analysis that applies the psychology of human behaviour to explain how consumers make decisions
What is bounded rationality?
When individuals make decisions but their rationality is limited by the knowledge they have, time they have and the limitations of their mind.
What is bounded self-control?
Individuals lack the self control to act in what they see as their self interest
Contrasting view of traditional economists and behavioural economists
Traditional economists believe that individuals have complete self control when making decisions. However, behavioural economist believe that all consumers have bounded self control.
What is a cognitive bias?
A systematic error in thinking that affects the decisions and judgements people make. This is because individuals make decisions based upon past experiences, and their own likes and dislikes.
What is availability bias?
When individuals make decisions based upon recalling similar images. For example,after reading several reports about car thefts the person willbegin to think its more common than it actually is.
What is anchoring?
A cognitive bias describing the human tendency to compare and contrast only a limited set of items.
Why are their biases based upon social norms?
Human beings are social animals which means that other peoples behaviour influences us
What are social norms?
Patterns of behaviour considered acceptable by a Society
What is a nudge?
Factors which encourage people to think and act in particular ways.
What is altruism?
Concern for The welfare of others. We promote the wellbeing of someone else even though me may suffer a consequence.
What is choice architecture?
Describes how a government guide people into making better decisions. Choice architecture can nudge consumers to make choices in their best interest.
What is default choice?
Key aspect of choice architecture in which one option is automatically selected unless an alternative is specified
What is framing?
The tendency for people to be influenced by the context in which the choice is presented. advertisers present consumer with choices in a manner that frames their products in favourable light.
What is mandated choice?
Where people are required by law to make a decision. Occurs when a choice architect designs a system that force individuals to make an explicit decision and not go ahead with a default decision.
What is restricted choice ?
Offering people a limited number of options so they are not overwhelmed by complexity. If there are too many choices, people may make a poorly thought -out decision or not make a decision at all.
Nudge theory in government policy
Nudge must be both open and transparent to the public. Governments should be honest with the public and ensure that they explain why the nudge is intorduced
