Micro Booklet 3 Flashcards
(25 cards)
Allocative Function of Prices
The role of prices in deciding who receives resources- when there is excess demand, price will rise and those with the greatest willingness and ability to pay will get the resources
Altruism
Acting entirely in the interests of others without regard to one’s own utility
Anchoring
When someone’s perceptions of something are skewed by a single initial piece of info
Asymmetric Information
When one party in a transaction knows more than the other
Availability Bias
A tendency to give undue importance to the most recent or well-known example of something, even if that is not representative
Bounded Rationality
Limitations to people’s ability to be rational based on their limited ability to process information, limited time and inaccurate or incomplete info
Bounded Self-control
A limited ability to put into practice utility-maximising behaviour, even if someone knows what the best course of action would be
Ceiling Price
A maximum price enforced by law or some other government intervention
Choice Architecture
Designing the choices that people take in order that they might make better decisions
Complete Market Failure
When the incentive function of prices breaks down and a market either disappears or fails to come into being, such as the market for public goods
Default Choice
The option that will be taken if no conscious decision is taken to change it
Demerit Good
A good which will be overconsumped in a free market because it is worse for the consumers than is commonly understood
Floor Price
A minimum price enforced by law or another government intervention
Framing
The tendency for an individual to be influenced by the context in which information is presented
Free-rider Problem
When the benefit of a good or service is not restricted to those who have paid, giving people an incentive to avoid paying in the hope/expectation that other people will, giving them a “free ride”
Government Failure
The cost of government intervention outweighs the benefits
Heuristics
Mental shortcuts or rules-of-thumb
Hypothecation
Ring-fencing the revenue from a tax for a particular purpose
Incentive Function of Prices
The role of prices in changing the behaviour of buyers and sellers
Indirect Tax
A tax on goods and services, either a fixed amount per unit (unit tax) or a percentage added to the pre-tax price (ad valorem tax)
Information Failure
When the info availiable to a decision-maker is incomplete, inaccurate or otherwise unreliable leading to market failure
Law of Unintended Consequences
The idea that any action is likely to result in a reaction other than that which was intended
Libertarian Paternalism
A philosophy that is libertarian in that it promotes freedom to choose, but paternalistic in the sense that it seeks to encourage better choices
Mandated Choice
A situation where the consumer must make a conscious decision one way or another before they are able to continue (no default choice)
