Micro - Rationality & Behavioural Economics

What are the underlying assumptions of rational economic decision making?

consumers aim to maximise utility and firms aim to maximise profits

the theory of diminishing marginal utility

for most people and goods as you consumer you will get less satisfaction

Maximisation

when an economic agent tries to obtain the most they can from the economic activity that they undertake

what do households/consumers with to maximise?

utility or personal satisfaction

what do firms wish to maximise?

profits

what do governments wish to maximise?

the welfare of the population

What are the factors of production

land labour capital enterprise

What are economic agents

households firms government

profit maximisation

firms seek to get the highest level of profit available in their production of goods and services

profit satisficing

level of profit below profit maximisation that satisfies the needs of the owners or managers of an organisation

sales maximisation

some firms will seek to maximise sales, possibly to gain market share

growth

some firms seek to maximise their growth potential

behavioural economics

looks at the psychological reasons behind why people make decisions

bounded rationality and what they are limited by

when people make decisions they are limited by: information available to them, their intellectual limitations and the time available to make decisions

social norms

the rules and behaviours that are considered acceptable within a social group

the nudge theory

an attempt to manipulate social norms through positive reinforcement in a non-coercive manner

habitual behaviour

people having regular routines and patterns that they follow

loss aversion

making decisions based on avoiding loss rather than achieving gain

computation

the ability to make correct decisions based on the information available to them

the three heuristics that can lead to irrational behaviour by individuals

availability, representativeness, anchoring and adjustment

what is availability

making judgement based on vivid events we can remember rather than information at hand

what is representativeness

categorising based on past information rather than on the information at hand

what is anchoring and adjustment

using an arbitrary starting number to estimate a different number