2.0 Individual Economic Decision Making (All in 1)

What is rational economic decision making

Involves individuals comparing the costs and benefits of possible decisions and choosing the option that maximises their utility or satisfaction.

What is utility theory

Suggests that individuals make choices to maximise their satisfaction or happiness

What is total utility

Total utility is the total satisfaction or happiness derived from consuming a certain quantity of goods or services

What is marginal utility

The additional satisfaction gained from consuming one more unit of a good or service

What is the hypothesis of diminishing marginal utility

The hypothesis of diminishing marginal utility states that as a consumer consumes more units of a good or service, the additional satisfaction gained from each additional unit decreases.

How does diminishing marginal utility relate to the demand curve?

Diminishing marginal utility supports a downward-sloping demand curve because as the quantity consumed increases, the price consumers are willing to pay decreases.

What is utility maximisation?

Utility maximisation occurs when consumers allocate their income in a way that maximises their total utility, given their budget constraints.

Why is information important for decision making

Accurate information allows economic agents to make rational and informed choice that maximise utility

What is asymmetric information

A situation where one party in economic transaction has more or better information than the other

How does imperfect information affect markets

It can lead to irrational decisions and market failure because agents cannot make fully informed choice

What is the difference between imperfect information and asymmetric information?

• Imperfect Information: A broad situation where parties don't have complete or perfect information during a transaction.

• Asymmetric Information: A specific case of imperfect information where one party has more or better information than the other, leading to an imbalance and potential problems like adverse selection or moral hazard.

What is bounded rationality

When individuals aim to make rational decisions but are limited by information, cognitive ability, and time

What is bounded self-control

When individuals lack the ability to resist immediate temptations in favour of long-term goals.

What is anchoring in decision making

The tendency to rely heavily on the first piece of information encountered when making decisions

What are rules of thumb

Simple decision making shortcuts or strategies that help individuals make choices quickly

What is availability bias

Overestimating the importance of information that is most readily available or recent

What are social norms

Accepted behaviours or standards within society that influence decision making

What is altruism

Refers to an individual acting out of concern for others, rather than self benefit

What is choice architecture

Refers to the design of decision environments, including how choices are presented, organised, and framed.

What is framing

Refers to the way choices are ways choices are worded or presented, which can affect individuals decisions

What is a nudge

A nudge is a subtle policy shift that encourages people to make decisions that are in their broad self interest without restricting their freedom of choice

What are default choices

Pre-set options that take effect if individuals do not make an active choice

What is restricted choice

Involves limiting the range of options available to simplify decision making

What is mandated choice

Mandated choice requires individuals to make an active decision rather than passively accepting a default