Individual Economic Decision Making Flashcards
(12 cards)
What is Rational Consumer Behaviour?
Decision-making process that is based on making choices that maximise utility.
This assumes:
• Consumers make all choices independently
• Consumers have fixed and consistent preferences
• Consumers have full information
• Consumers always make the optimal choice given their preferences
What is Total Utility?
The total satisfaction the consumer gets from purchasing units of a good.
Rational consumers aim to maximise their total utility.
What is Marginal Utility?
The change in total utility from consuming an extra unit of
a product.
What is the Law Of Diminishing Marginal Utility?
As a consumer consumes
more units of a good, the extra satisfaction gained diminishes.
This means at higher quantities, consumers are less willing to pay a higher price, helping to
explain the downward sloping demand curve.
What is Symmetrical Information?
Buyers and sellers having the same information
What is Asymmetric Information?
Buyers and sellers have different amounts of information
E.g. buyers often know less than sellers when buying second- hand cars
Buyers often know more than sellers when buying car insurance
What is Adverse Selection?
Where one party has more information than the other, leading to unbalanced or inefficient transactions.
Occurs before a transaction
For instance, in the health insurance market, individuals who are aware of their higher health risks are more inclined to purchase insurance, while healthier individuals may opt out. This can lead to a pool of insured individuals that is riskier than the general population, driving up premiums and potentially causing market inefficiencies.
What is a Moral Hazard?
An economic concept that arises when one party engages in riskier behavior because they do not bear the full consequences of their actions.
Occurs after a transaction
Eg: Insurance: An individual with comprehensive car insurance might drive more recklessly, knowing that any damages will be covered by the insurer.
What is the Principle-Agent Problem?
The Principal-Agent Problem as arising when the interests of a company’s owners (the principals) are not aligned with those of its managers (the agents) who make decisions on their behalf.
Eg: Corporate Management: Shareholders (principals) hire managers (agents) to run a company. Managers might prioritize personal benefits, like bonuses or job security, over maximizing shareholder value.
What is Information Failure?
A situation where people have inaccurate, incomplete,
uncertain or misunderstood data and so make potentially ‘wrong’ choices
What is an Information Gap?
Information gaps exist when either the buyer or seller does not have access to the information needed for them to make a fully-informed decision
This leads to a misallocation of scarce resources (market failure)
Policies to address information failure/gaps?
Government policies can improve information to help producers and
consumers value the actual costs and benefits more accurately
• Compulsory labelling on products
• Improved nutritional information on food/drinks
• Hard-hitting anti-speeding advertising
• Campaigns to raise awareness of risks of drink-driving/drug abuse/
smoking/vaping
• Campaigns on dangers of gambling addiction
• Performance league tables for
schools/school inspections
• Consumer protection laws
• Industry standards and guarantees
for selling used products
