4.1.2 - Behavioural Economics

Rational Behaviour

Acting in pursuit of self interest, which means for consumers trying to maximise welfare, utility and satisfaction gained from consumption of goods/services

Utility

Satisfaction or economic welfare gained by an individual from consuming a good or service

Marginal utility

The additional satisfaction or utility gained by an individual from the consumption of one extra unit of a good/service

Diminishing marginal utility

For a single individual, the marginal utility derived from a product diminishes for each unit consumed

Constraints many consumers face

1. Limited income

2. Set of prices

3. The budget constraint

4. Limited time available

Importance of making decisions at the margin

1. Allows consumer to think ahead

2. Helps consumers to stop thinking about what they currently have

3. Allows them to consider how to maximise their utility now or later

4. Increases productivity

Asymmetric information

Occurs when one party to a market transaction has less relevant information about the exchange than the other