Behavioural economics

Behavioural Economics

A field that disputes rationality and utility maximization by arguing that emotional, social, and psychological factors influence decision-making.

Rational Consumer

A consumer who gathers information, analyzes pros and cons, and makes utility-maximizing decisions after careful consideration.

Behavioral Consumer

A consumer who may not make decisions based solely on rational analysis due to time constraints, overwhelming choices, or lack of clear information.

Bounded Rationality

The notion that consumers are limited by self-control, which impacts their decision-making processes.

Heuristics

Rules of thumb that consumers follow to make satisfying, yet possibly less optimal, decisions.

Marginal Utility

The additional utility gained from consuming one more unit of a good.

Average Utility

Total utility divided by the total quantity of goods consumed.

Law of Diminishing Marginal Utility

As consumption increases, the additional utility gained from each additional unit decreases.

Consumer Surplus

The difference between the price a consumer is willing to pay and the actual price they pay.

Producer Surplus

The difference between the price producers are willing to accept and the price they actually receive for a good.

Society Surplus

The sum of consumer surplus and producer surplus.

Paradox of Value

The economist's problem of determining the relative prices of products, relating to the marginal utility and price in equilibrium.

Indifference Curve

A curve representing combinations of two goods that yield equal satisfaction, indicating consumer indifference.

Budget Line

A line that shows all combinations of goods that a consumer can obtain given their income and the prices of those goods.

Equilibrium

Occurs when the budget line is tangent to the indifference curve, indicating an optimal consumption choice.

Substitution Effect

A change in the price of a good that makes it relatively more or less expensive compared to other goods, causing consumers to switch between goods.

Income Effect

The impact of a price change on a consumer's purchasing power, affecting their real income and consumption patterns.

Price Discrimination

The practice of charging different prices to different consumers for the same good/service, based on their willingness to pay.

Conditions for Price Discrimination

Necessary conditions include price-making ability, identifying market segments, and preventing resale (market seepage).

Difference between Income Effect and Substitution Effect

The income effect refers to the change in a consumer's purchasing power due to a price change, affecting overall consumption patterns. The substitution effect, on the other hand, describes how a change in the price of a good influences consumers to switch to substitute goods that are relatively cheaper.