Unit 1 Flashcards
(26 cards)
Utility Satisfaction
How happy are consumers consuming a good or utility
Rational Choice theory
Maximisation occurs when an economic agent tries to obtain the most that they can from the economic activity that they undertake.
Where does utility maximization occur?
Where marginal utility is 0.
Law of diminishing marginal utility
States that as a person increases consumption of a good, whilst keeping consumption of other goods constant, there’s a decline in the marginal utility from consuming each additional unit of good.
Utility maximisation equation
MUx / Px = MUy/ Py
Importance of the margin
- Fundamental when individuals are making choices.
- Individuals will only actually choose to consume something if their marginal benefit is greater than their marginal cost.
Market for lemons
The seller knowing more information than the buyer. Eg. Used car sale.
Perfect information
All information on price, quality and utility available from goods and service. Everyone knows everything.
Imperfect information
Leads to consumers making decisions that doesn’t necessarily lead to utility maximisation.
Asymmetric information
When one party in a market transaction possesses less information relevant to the exchange than the other party.
Symmetric information
When all the relevant information is known by both parties.
Significance of asymmetric information
- Markets are unable to operate efficiently if economic agents don’t have appropriate information.
- Economic agents are therefore unable to undertake rational decisions.
Bounded rationality
The mind has only a limited ability to process and evaluate information.
Rules of thumb
Thinking shortcuts individuals use to make decisions. Eg. repurchasing the same soft drink as you previously enjoyed.
Anchoring
Relying on particular pieces of information especially where they lack knowledge or experience.
Availability
Making judgements about the probability of event by recalling recent incidents.
Social norms
The influences of others on decision making. Eg.peer presure.
Altruism and fairness
People tend to be motivated to ‘do the right thing’. Eg. Giving to charity may seem irrational but can genuinely give an individual a sense of satisfaction.
Nudge theory
An attempt to manipulate social norms through positive reinforcement in a non-coercive manner.
Tversky and Kahneman’s three heuristics that can lead to irrational behaviour
- Availability- making judgements based on previous events.
- Representatives- categorised based on past information rather than the information at hand.
- Anchoring and adjustment- using an arbitrary starting number to estimate a different number.
Choice architecture
A framework setting out different ways in which choices can be presented to consumers and how it can then influence their decision making.
Default choice
An option that’s selected automatically unless an alternative is specified.
Framing
How something is presented influences the choices people make. Politicians can often frame economic statements in a manner which is favourable.
Mandated choice
People are required by law to make a decision. Forces individuals to make a decision either way to avoid going ahead with a default.
