CPE: Decision-Making Framework

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15 Terms

1
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What is the process of decision-making?

Requires every economic agent to deliberate on available choices, considering constraints, benefits, costs, information, and perspectives.

2
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What is a Rational Economic Agent?

Assumed to aim to maximise their own benefits and minimise costs of the choice being made. They assess intended and unintended consequences.

3
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What are Economic Agents?

Consumers, producers, and the government.

4
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What are Constraints? (Element of Decision-Making)

Limits faced by economic agents (e.g., time, financial resources, cognitive abilities) that determine available choices.

5
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What are Costs and Benefits? (Element of Decision-Making)

Every economic decision has a set of monetary and non-monetary costs and benefits, including opportunity cost. Economic agents aim for maximum net benefits.

6
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What is Information? (Element of Decision-Making)

Quantitative and qualitative data gathered by economic agents on costs and benefits to make sound, accurate decisions.

7
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What are Perspectives? (Element of Decision-Making)

Economic agents consider the impact on and reaction from others affected by their decisions. Their rationality is not completely free from political or social perspectives.

8
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What are Intended Consequences? (Outcome of Economic Decisions)

The expected outcomes when economic agents make decisions based on rational behavior and unchanging economic conditions to resolve an economic problem.

9
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What are Unintended Consequences? (Outcome of Economic Decisions)

Outcomes that are not intended in the economic decision, often due to imperfect information or unpredictable changes in environment.

10
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What are Internal changes? (Review of Decision-Making)

Changes in goals, constraints, information, and perspectives of economic agents over time, requiring a review of past decisions.

11
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What are Changes in the external environment? (Review of Decision-Making)

External factors (e.g., global competitiveness) constantly change, influencing decisions and requiring review to achieve intended outcomes.

12
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What are the three key economic questions for society?

What and how much to produce? How to produce? For whom to produce?

13
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What is a Free Market Economy?

Markets decide and allocate resources through the price mechanism based on demand and supply forces, with a limited role for government (protecting property rights, value of money).

14
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What is a Planned or Command Economy?

Scarce resources are owned by the government. The state allocates resources, sets production targets, and distributes goods/services based on its view of needs. Market prices play little role.

15
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What is a Mixed Economy?

Some resources owned by the public sector (government), others by the private sector (firms and households). Public sector supplies public/merit goods and intervenes in markets.