A-level Economics key content part 2

what are the cons of system 1 (Kahneman)

prone to bias from external factors

emotional responses can lead to irrational decisions

what are the cons of system 2 (Kahneman)

easily manipulates as facts could be false information

very time consuming and therefore not realistic

why would a business use intuition

when they don’t have access to facts and to statistics

what is the rational decisions making model (steps in order)

1)identify problem

2)identify the decisions criteria

3)weight the criteria

4)generate alternatives

5)evaluate those alternatives

6)choose best alternative

7)carry out that decisions

8)evaluate the decisions you’ve made

what are the limitations of the rational decisions making model?

time consuming

too many steps

not always the most effective model

some problems are more complex than this model

what is the administrative model also know as

the bounded rationality model

what does the administrative model do

recognises limitations

what are the assumptions of the bounded rationality model

the first alternative that is satisfactory is chosen

decisionmaker recognises that the world is simple

need to make comfortable decisions without considering EVERY alternative

decisions can be made by heuristics

what does “recognising that the world is simple” mean

acknowledging that you cannot know everything

what is heuristics

mental shortcuts or rules of thumb that simplify decisions making e.g. making your bed out of habit

what is the law of diminishing marginal utility

as a consumer consumes more units of a good or service, the additional satisfaction gained from each extra unit falls.

what is total utility

total consumption you derive from a given level of consumption

what is marginal utility

change in satisfaction from consuming an extra unit

what is utility measured in

utils

what is the nature of utility

differs from person to person

changes overtime during periods of high and low demand

differs from place e.g. aircon in hot countries is used more

what is the correspondence between utility and satisfaction

as you consume more your Mu decreases as you aren’t satisfied with consuming more as you already have

what happens if total utility increases but in smaller increments

marginal utility decreases because you don’t get any EXTRA satisfaction from consuming another unit

assumptions of utility theory are

• a consumer can rank any number of given options

• more total utility is always better than less total utility

• mix of goods and services is better than a set of one good

• consumers are rational decision makers

what is the standard economic theory

diminishing returns, marginal utility of extra units declines as more is consumed

marginal utility and willingness to pay…

Mu may fall past a certain point

is Mu is falling then consumers well pay a lower price

consumers aim to maximise utility

facts of the demand curve

generally facing downwards, inverse relationship between price and quantity

what happens when price increases

less of a product is demanded as its less affordable

what does the law of diminishing marginal utility state

an extra unit of the good is conserved so marginal utility decreases

demand is based off what

the ability to buy something

what is market demand

sum of all the individual demands

what are the 2 types of demand

effective demand and market demand

what is a market

where buyers and sellers meet to exchange goods and services at a price

what are the 4 types of markets

factor-factors of production

financial-borrow/save money via bank or capital

capital-buy/sell shares

foreign exchange-buy/sell currency

what is the commodity market

where raw materials are bought and sold

what are the 2 types of raw materials

hard and soft