Individual Economic Decision making Flashcards
(35 cards)
What influences individual economic decisions?
- Rationality
- Incentives
- Marginal Utility
What is marginal utility?
The additional benefit a consumer gians frm consuming one more unit of output
What does ‘rational’ economic agents mean?
COnsumers loom to maximise utility etc
What is utility?
The statisfaction gained frm consuming a g/s
If there is lower utility….?
consumers less willing to pay the price
How is total utility calculated?
Adding the marginal utilities of each unit
What is The Law of Dimminihing Marginal Utility?
States that as additional g/s are consumed, the utility from the next unit is lower than the utility gained frm the previous one.
As total utility increases…?
marginal utility general decreases
What is utility maximisation?
When they spend their limited income in such a way to achieve most satisfaction from their money.
Word for weighing up cost and benefits of consuming another unit?
Deciding at the margin
Just consumers and utility?
Firms also weigh MC and MB of allocating resources in a particle way
What is perfect information?
Where buyers and sellers have same amount of info
What is asymmetric info?
example and revelance?
Where buyers and sellers have different amount of info.
Eg used cars
We assume rational decisions uses perfect information
What is the aim of behavioural economics?
Questions the assumptions of traditional economic theory that economic agents act rationally
Why are agents unlikely to make rational decisions?
Bounded rationality, bounded self-control. biases
Describe characteristics of traditional economic theory.
- Takes time to gather and analyse logically all information regarding decision
- Know exactly what they want, and aim to solely maximise their utility
Describe the characteristics of behavioural economics.
- Lots of info can make decisions more complex
- Consumers take risk that can go against reason
- Emotions influence decisions
- People care about other things than maximising their self interest
What are the cognitive biases
systematic errors in thinking that can affect decision making
What is confirmation bias?
Cognitive bias
The ttendency to interpret new information as a confirmation of their existing beliefs
What is loss aversion?
Cognitive bias
When the suffering from a loss is felt more extremely than the satisfaction from gain
what is anchoring bias?
Congintiive bias
Tendancy to be reliant on the first peice of info they get
Explain Bounded rationaility theory.
Rational decision making limites due to thinking capacity, availbaility of info and lack of time.
Too much information makes decisions difficult.
Explain Bounded self-control
Argues individuals have limited capcity to regulate their behaviour and make decision based on a range of desires and impulses.
‘Self control cannot be endlessly exercised’
Includes herd mentality
List and explain other types of biases?
Rule of thumb - When choices are based on default choices based on past experiences
Framing - Refers to how presentation or wording can ifnluence choices (eg 20% fat
Availbaili
