Rational Choice Theory + Imperfect Info 4.1.2./2 Flashcards
(20 cards)
What does traditional neoclassical economic theory assume about consumer behaviour
That consumers always act rationally seeking to maximise satisfaction for every pound spent on each product they buy
What is rational behaviour
Acting in pursuit of self interest
According to neoclassical theory economic agents act to maximise their net benefits by weighing up the costs and benefits of possible decisions
What is utility maximisation
Where consumers seek to achieve the highest satisfaction or benefit from their economic decisions within a limited budget
What 5 constraints may restrict consumers choices they make in the marketplace
Imperfect information
Limited income
A given set of prices
The budget constraint
Limited time available
What direction does the diminishing marginal utility curve slope
Downwards
What’s the hypothesis of diminishing marginal utility
As a person increases consumption of a good , whilst keeping consumption of other products constant, there is a decline in the marginal utility derived form consuming each additional good
What does imperfect information cause for consumers, what can it be a source of
Means they do not posses all the information required to make a fully informed decisions
Making it difficult to make rational decisions so can be a potential source of MARKET FAILURE
What are some sources of imperfect information
Too little/much information
Economic agents may know more / less information than other parties involved in the transaction
Information can be presented in some way which exclude some groups of people,but be meaningful to others (technical / legal jardons)
There can be a cost involved in acquiring information which can deter people from gaining the information / eg mechanical checks on cars, house surveys etc
What can imperfect information lead to in terms of merit and demerit goods
Merit goods- imperfect information can lead to under consumption
Demerit goods- imperfect info can lead to over consumption
What is asymmetric information
Form of imperfect information when one party has more or superior information than the other party
Example of imperfect info in merit goods
Health care - too much information from the internet, thinking people can solve it themselves and chose not to go due to info on google
Too much info can make them over consume as they may go to doctors as they will make false claims about serious illnesses , taking up doctors appointments
Example of imperfect info - demerit goods
Alcohol - not looking at the information they do not understand units or percentage of alcohol
Health effects / unaware of them
Example of assymetric information
Second hand car market teh salesperson knows more abut the quality of the car than the buyer
An individual may know more about their creditworthiness than the bank from which tehy are trying to secure a loan with
What can assymetric information lead to
Creating what ?
Adverse selection
Creating a market for lemons
What can assymetric information lead to
Creating what ?
Adverse selection
Creating a market for lemons
What is a moral hazard
The tendency of individuals and firms once insured against some contingency , to behave so as to make that contingency more likely
What is a moral hazard
Where one party may choose to make decisions that are very risky because they know less that the other party will bear the burden if the risk leads to large losses
-The tendency of individuals and firms once insured against some contingency , to behave so as to make that contingency more likely
What can assymetric information lead to
Creating what ?
Adverse selection
Creating a market for lemons
What is a moral hazard
Where one party may choose to make decisions that are very risky because they know less that the other party will bear the burden if the risk leads to large losses
-The tendency of individuals and firms once insured against some contingency , to behave so as to make that contingency more likely
What can assymetric information lead to
Creating what ?
Adverse selection
Creating a market for lemons
