3.12 Individual economic decision behaviour
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66 Terms
what is individual economic - decision making influenced by?
rationality
incentives
margianl utility
rationality
making choices by weighing up outcomes and choosing the option with the highest net benefit
incentives
factors that encourage you to choose one option over another
marginal utility
the extra satisfaction from consuming one more unit
how are consumers assumed to behave?
Consumers aim to maximise utility,
how are producers aimed to behave?
they maximise profit
how are workers assumed to behave?
they balance pay and welfare ( spending )
how are governments assumed to behave?
they aim to maximise public welfare
why is the rationality assumption limited?
People often make emotional or impulse decisions.
what is utility?
The satisfaction gained from consumption.
what is diminishing marginal utility?
Each extra unit gives less satisfaction than the previous one.
why does demand curve slope downwards?
Because later units give less utility, so consumers need a lower price to keep buying more.
what is total utility
The sum of all marginal utilities.
what is utility maximisation?
Spending income to get the most satisfaction possible.
what is marginal analysis?
Deciding by comparing marginal benefit and marginal cost.
When does a rational consumer stop consuming?
When marginal benefit equals marginal cost
Why is marginal analysis important?
It helps allocate scarce resources efficiently.
why does total utility still rise?
Because total utility is the sum of all marginal utilities.
How does diminishing marginal utility help explain demand?
As utility falls, consumers need a lower price to keep buying more.
what does deciding at the margin mean?
Weighing the extra benefit against the extra cost of one more unit.
When do consumers keep consuming?
Until marginal benefit = marginal cost.
Why is marginal analysis important?
It helps consumers, firms, and governments make optimal choices with scarce resources.
what is perfect information
Buyers and sellers have the same information about a good or service. This is called symmetric information.
what is asymmetric information
When one side knows more than the other. For example, a seller may know more about a used car than the buyer.
Why is information important for decision making?
You need information on price, quality, substitutes, and product claims to make a rational choice.
Why does lack of information matter?
It can lead to poor decisions, so markets may not work efficiently.
What is the significance of asymmetric information?
It causes market failure because prices and quantities are no longer socially optimal.
How does asymmetric information affect output?
It can cause over-provision or under-provision of goods and services
When might under-provision happen?
If buyers knew about dangerous side effects, demand would fall, so fewer resources should be used to produce it.
When might over-provision happen?
If buyers knew about extra benefits, demand would rise, so more resources should be allocated.
Example of asymmetric information?
The VW emissions scandal: buyers were misled about the true environmental impact.
behavioural economics
a field that combines psychology and economics to explain how people actually make decisions, including irrational ones.
bounded rationality
the idea that you do not always have enough time, information, or thinking capacity to make fully rational choices.
bounded self control
the idea that you have limited ability to resist impulses or conflicting desires.
bias
a tendency that affects how you process information and can lead you away from rational decision-making.
rule of thumb
a default choice you make based on habit or past experience.
anchoring
relying too heavily on an initial piece of information when making a decision.
framing
how information is presented, which can change your judgement.
availibility bias
judging something based on examples that come to mind easily.
social norms
informal rules about how people are expected to behave in society.
altruism
acting to benefit others, even if it does not benefit you directly.
perception
how you interpret what is fair, right, or desirable.
what is choice architecture?
the way choices are designed and presented to influence decisions
what is the aim of choice architecture
To simplify decision-making and encourage a particular choice.
what is a default choice?
A choice you are automatically signed up to unless you opt out.
Why are default choices powerful?
People rarely change from the default.
what is restricted choice?
When the options available are limited to help people make better decisions.
what is a mandated choice?
A choice that must be made because it is required by law or rules.
one advantage of choice architecture?
It can influence behaviour towards better outcomes.
one disadvantage of choice architecture
It can be seen as manipulative.
what is nudge theory?
Using small prompts to influence behaviour without removing freedom of choice.
Who coined “nudge theory”?
Richard Thaler.
What is the EAST framework?
Easy, Attractive, Social, Timely.
what does easy mean in EAST
make the choice simple
what does attractive mean in EAST
make the option catch attention
what does social mean in EAST
people are influenced by what others do
what does timely mean?
nudge people when they are most responsive
one advnatage of nudges
they are cost effective
another advantage of nudges
They preserve freedom of choice.
one disadvantage of nudges
They may be unethical or lack transparency.
UK government example of a nudge?
Automatic enrolment into workplace pensions.
Why use workplace pension nudges?
To increase retirement saving and reduce pressure on the state.
UK government health nudge example?
Health checks for ages 40–74.
Why are health checks useful?
They help with early detection and improve public health.
UK government food nudge example?
Traffic light labels on food packaging.
Why are food labels useful?
They help people make more informed choices.