Consumer Behaviour - 26/09 Flashcards
(28 cards)
What is utility
A measurement of overall satisfaction of wellbeing
Who introduced the concept of utility
Danial Bernoulli
As wealth increases utility …
increases
but utility is not solely derived from wealth states
Example of utility
bottle of water:
James is thirsty from the gym
—> would pay up to $5
tina sat on the sofa
—> would pay no more then 65p
Why does utility differ between people
People value goods differently, they derive different levels of utility
what is rational decision making
Where economic agents respond to economic incentives
examples of rational decision making
landlord puts rent up
—> more likely to move house
traits of homo economicus “economic human”
- narrow minded and self interested (only cares to maximise his own utility)
- Rational (use all available information to arrive at best decision)
- Perfect computaion
what is homo economicus for consumers
Maximise utility
What is homo economicus for firms
Maximise profits
how do economic agents maximise utility when the world is more complicated
Using marginal utility
The margin definition
Adding or taking away just a little amount from the current situation
Why do we care about the margin
economic decisions are made on the margin
Marginal utility definition
The utility received from purchasing an extra unit of a good
Law of diminishing marginal utility definition
The marginal utility received decreases as a consumer buys more units of the good
Perfect information definition
When buyers and sellers have complete information concerning factors that could influence decisions to buy and how to produce a good
3 information both producers and consumers need to know in order for it to be a perfect market
- product quality
- product prices
- costs of production
how is perfect information linked to homo economicus
perfect information allows economic agents to make the most informed decisions
–> links to homoeconomicus who uses rationality and perfect information for the best decision
Imperfect information definition
Where economic agents are not able to access all of the relevant information about a market
Why does imperfect information matter
–> very few markets have imperfect information
–> leads to Market failure in many markets
Asymmetric information definition
Where the buyers and sellers in a market have access to different amounts of market information
who wrote about the used car market (market for lemons)
George Akerlof
Why does the market for lemons fail
market breaks down because average prices for cars of different qualtites are being offered which sellers know their car is worth more so they don’t sell… process repeats
How does Asymetric information lead to moral hazard
Gets insurance on her laptop and incentivizes her to take less care of it because the insurance company has no way of tracking what she does with it
