Chapter 2 Flashcards
(29 cards)
What is traditional economic theory?
Traditional economic theory assumes that consumers always act rationally, seeking to maximise satisfaction
What is utility?
The amount of satisfaction or benefit that a consumer gains from consuming a good or service
What is a description of a rational consumer?
An assumption of traditional economic theory that consumers act in such a way to maximise utility when spending money on a good or service
What is marginal utility?
The satisfaction gained from consuming an additional unit of a good or service
What is the law of diminishing marginal utility?
As individuals consume more units of a good or service, the additional units give successively smaller increases in total satisfaction
How does the law of diminishing marginal utility effect the individual demand curve?
As marginal utility declines, the price the consumer is willing to pay for additional units decreases
What is imperfect information?
The fact that consumers rarely possess all the information required to make fully informed decisions
What is the effect of imperfect information?
It causes consumers to not always act rationally
Name three sources of imperfect information:
Economic agents may know more or less than other parties in a transaction
Information can be presented in such a way that excludes some people e.g technical or legal jargon
There could be costs involved of acquiring some information
What is asymmetric information?
A source of information failure where one economic agent knows more than another, giving them more power in a market transaction
What are two examples of markets that contain asymmetric information?
The market for so-called “lemons” where a second-hand car salesman knows more about the quality of the car that he is selling than the buyer
Where and individual may know more about their credit-worthiness than the bank from which they are trying to secure a loan from
What are the results of asymmetric information?
Market failure.
Uncertainty also leads to a lack of trust between economic agents, meaning mutually beneficial exchange does not always occur
What is behavioural economic theory?
Behavioural economics recognises the social, moral and psychological factors that determine the power of economic agents
What are the aspects of behavioural economic theory?
Bounded rationality
Bounded self-control
Rules of thumb
Anchoring
Availability bias
Social norms
Altruism and fairness
What is bounded rationality and it’s factors?
When people try to act rationally but are restricted by factors such as:
The human mind having limited ability to process information
The available information being incomplete
Time to make decisions is limited
What is bounded self-control?
When individuals lack the self-discipline to see their rational good intentions through e.g regular gym attendance and giving up smoking
What are the results of bounded rationality?
Individuals end up satisficing, or accepting sub-optimal outcomes
What is meant by “rules of thumb”?
Thinking shortcuts, that individuals use to make decisions in order to save time and effort
What is anchoring?
The tendency of individuals to rely on particular pieces of information when making choices between different goods and services e.g a consumer looking at car insurance quotes, focusing on price as the key point of comparison rather than the features and excesses
What is the availability bias?
When people make judgements about the probability of events by recalling recent instances e.g recalling a family member who lost their family savings in the last recession, therefore discouraging personal savings
What is a social norm?
When individuals are influenced by others when making decisions
What is altruism and fairness?
Individuals are motivated to do the right thing, even if this means paying more for a good or service
What is choice architecture?
Influencing consumer choices by the way choices are presented
What are the forms of choice architecture?
Framing
Nudges
Default choice
Mandated choice
Restricted choice
