Individual economic decision making

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Rational decision making
Make decisions based solely on trying to gain the maximum utility possible and nothing else will influence their decision making
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Marginal utility
The benefit gained from consuming one additional unit of a good
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Total utility
The overall benefit gained from consuming a good
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Law of diminishing marginal utility
For each additional unit of a good that's consumed, the marginal utility gained decreases
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A rational consumer will consume at what point?
Marginal Utility = Price
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Why does the demand curve slope downwards?
The law of diminishing marginal utility - Marginal utility decreases with each extra good consumed and the price the consumer is willing to pay decreases
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Economic objectives for firms
Maximise profit, maximise total sales, market share, ethical objectives
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Economic objectives for consumers
Maximise utility while not spending more than income, workers assumed to maximise income while having as much free time
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Economic objectives for governments
Balance the resources of a country with the needs and wants of the population - macroeconomic objectives
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Behavioural economics
Looks at the impact of social, psychological and emotional factors on decision making to try to make more realistic predictions about the decisions that individuals make
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What to traditional economic theories assume?
Everyone has perfect information and the ability to use this information to make a rational decision
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Asymmetric information
Occurs when one party has more information that the other
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Why don't consumers act rationally?
Limited time to make a decision, Not all information is available, computation weakness
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Bounded rationality
People tend to satisfice rather than spend ages trying to make a rational decision which maximises utility
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Bounded self-control
A rational individual is assumed to have total self-control and will only act to maximise utility, however in reality people have limits on their self control
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Behavioural economists believe that individuals are influenced by.....
biases
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Rules of thumb
Useful tools that help an individual make a decision
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Anchoring
Too much emphasis on one piece of information
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Availability bias
Judgements are made about the probability of events occurring based on how easy it is to remember
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Social norms
Influenced by the behaviour of their social group
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Habitual behaviour
Same thing over and over again
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Fairness can affect decision making
Behavioural economists argue that individuals and firms don't just act out of self-interest - they may have a sense of fairness and choose to act altruistically
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Choice architecture
Individual's choice is influenced by adapting the way the choice is presented
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Default options
People are more likely to choose the 'default' option, so this can be used to encourage individuals to act in a certain way
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Framing
Context in which information is presented
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Nudges
Alternatives are made easier to choose than others without removing the freedom
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Restricted choice
People's choices are restricted
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Mandated choices
People have to make a decision
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How can governments and producers influence the decisions of individuals or firms (choice architecture)?
Using insights from behavioural economists - Default options, Framing, Nudges, Restricted choice, Mandated choice
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Importance of the margin when making choices
Important in understanding how consumers act rationally
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Behavioural economists challenge.....
the key assumptions in traditional economic theory: economic agents are rational and utility maximisers
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Constraints which restrict consumer choice
Limited income, A set of given prices, The budget constraint, Limited time available
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Cognitive bias
A mistake or reasoning in some other mental process occuring as a result of, for example, using rules-of-thumb or holding onto one's preferences and beliefs regardless of contrary information
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Economic sanctions
Restrictions imposed by regulations that restrict an individual's freedom to behave in certain ways
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Altruism
Concerns for the welfare of others
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Fairness
The quality of being impartial, just, or free of favouritism
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Nudges vs Shoves
Nudges - Information for ppl to respond to,Opt-out schemes rather than default choices, active choosing. Shove - Alter incentives, punish, fines, laws banning activities and regulations.
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Other cards in this set

Card 2

Front

The benefit gained from consuming one additional unit of a good

Back

Marginal utility

Card 3

Front

The overall benefit gained from consuming a good

Back

Preview of the back of card 3

Card 4

Front

For each additional unit of a good that's consumed, the marginal utility gained decreases

Back

Preview of the back of card 4

Card 5

Front

Marginal Utility = Price

Back

Preview of the back of card 5
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