Individual economic decision making Flashcards
(24 cards)
What is the law of demand
- If prices increase, demand decreases, vice versa
- Change in price causes movement along the demand curve
- Change in factors shifts the demand curve
What are the factors shifting demand
- Tastes/preferences
- Price of other goods
- Seasonality
- Income
What is neoclassical demand theory
Consumers act rationally to maximise utility (satisfaction + welfare)
What is utility
Satisfaction from goods/services
- TU = sum of all satisfaction gained from G/S
- MU = additional satisfaction gained from each unit
What does it mean to maximise utility
Choose between options to maximise utility (MUA / PA = MUB / PB)
- Restraints = limited income, given prices, budget, time
What is disutility
Negative feeling from increased consumption (junk food, spam advertising)
What is the law of diminishing marginal utility
When MU decreases as units consumed increases
- Total satisfaction reached when MU = 0
- TU rises proportionally to falling MU and starts to fall when MU reaches 0
What is information failure
- Lack of info (merit/demerit goods)
- Asymmetric info (labour, second hand goods, insurance)
What is the importance of information in economic decision making
- Efficient resource allocation to avoid over/underconsumption
- Allows consumers and producers same knowledge
- Imbalanced info leads to market failure
What is asymmetric info
When one economic party has less knowledge than the other leading to distorted demand, price and consumption
How can information provision solve market failure
- Merit goods benefit from info provision as increases consumption closer to social optimum
- Demerit goods suffer from info provision as decreases consumption closer to social optimum
What is behavioural economic theory
Questions assumed rationality of consumers as they are subject to emotion and impulsivity and are easily influenced
What is bounded rationality
Rational economic decision making restricted by time, information availability and mental capacity limits
What is bounded self-control
Rational economic decision making restricted by limited will power due to addiction and immediate gratification
What is thinking fast and thinking slow
- Thinking fast = intuitive and little effort
- Thinking slow = concentrated and deliberate
What are examples of decisions biases
- Rules of thumb
- Anchoring (first impressions)
- Availability (recent info)
- Social norms (what others are doing)
- Altruism (morals)
- Perception of fairness
- Heuristics (quick aids)
- Loss aversion
- Sunk cost fallacy
- Mental accounting
What is choice architecture
Retain the right to choose but are nudged towards a certain option
What are the types of choice architecture
- Framing
- Nudges
- Shoves
- Default choices
- Restricted choices
- Mandated choices
What is framing
Influence consumers choices by how information is presented (make one option seem more appealing than the other)
What are nudges
Small suggestions and positive reinforcement towards certain choices (design things to be benefitted by certain choices and discourage others)
What are shoves
Explicit regulation on decision making eg. smoking bans discourage purchase of cigarettes as harder to consume
What are default choices
Habitual purchases eg. subscriptions to magazine editions, or buying coffee every morning
What are mandated choices
Purchases that must be made by law eg. car insurance
What are the criticisms of choice architecture
- Paternalistic
- Questioned effectiveness
- Unpredictable impact
- Information provision
- Policy strength
