Chapter 2 Flashcards
(24 cards)
What’s traditional neoclassical economic theory suggest on consumers
Homo economicus - traditional economic man who only acts in their own interest by making rational decisions to maximise their own utility by being selfish
Utility
Amount of satisfaction or benefit consumer gains from consuming a good or service
Marginal utility
Satisfaction gained from consuming an additional unit of a good or service
Hypothesis of diminishing marginal utility
As individuals consume more units of a good or service, the additional units give smaller increases in total satisfaction
What does demand represent
Marginal benefit of consumer (which is why hypothesis of marginal utility explains why demand curve is down sloping)
Imperfect information
When economic agents don’t know everything they need to know in order to make a fully informed decision
Asymmetric information
Source of information failure where one economic agents knows more than another, giving them more power in the transaction
Behavioural economic theory
Recognition of social, moral and psychological factors that determine the behaviour of economic agents.
Questions traditional assumptions
Bounded rationality
When people try to behave rationally but are restricted by factors
Reasons for bounded rationality
Limited ability to process and evaluate information
Avaliable information is incomplete and often unreliable
Time avaliable to make decisions is limited
Bounded self control
When individuals lack the self discipline to see their rational good intentions through
‘Predictable irrational’ - Dan Ariely
Cognitive bias examples
Rules of thumb
Anchoring
Availability
Social norms
Altruism and fairness
Rules of thumb
Thinking shortcuts or informed guesses that individuals use to make decisions in order to save time and effort
(Ordering the same drink because you enjoyed it previously)
Anchoring
The tendency of individuals to rely on particular pieces of information whne making choices between different goods and services
(If the same good is this prices in one shop then it should be similar/same in another no matter the quality)
Availability
When people make judgements about the probability of events by recalling recent instances
(Family member lost their retirement savings in last recession, so discouraging personal savings)
Social norms
When individuals are influenced by others when making decisions
(Don’t smoke in public it’s bad)
Altruism and fairness
Individuals are motivated to do the right thing even if this means paying more for it
Behavioural economics and economic policies
Choice architecture
Framing
Nudges
Default choice
Mandated choice
Restricted choice
Choice architecture
Influencing consumer choices by the way choices are presented
Framing
Influencing consumer choices by the way words and numbers are used
Nudges
Influencing consumer behaviour via the use of gentle suggestions and positive reinforcement
Default choice
Influencing consumer behaviour by setting socially desirable choices as default choices
Mandated choice
Where people are legally required to make a choice
Restricted choice
Giving consumers a limited number of options when making a choice
