Individual Economic Decision Making

Front 1

Law Of Demand

Back 1

As goods price falls, more is demanded (and vice versa(

Front 2

Contraction/Extension in demand curve

Back 2

Movement along the demand curve due to change in price, Extension=price fall, Contraction=price rise

Front 3

Conditions of Demand

Back 3

Non-price factors influencing demand, E.g. Income, Quality, Substitutes, Advertising

Front 4

Rational Behaviour

Back 4

Acting in pursuit of self-interest, for consumers, this means attempting to maximise their utility, welfare or satisfaction gained from good and services consumed

Front 5

Utility

Back 5

The satisfaction or welfare an individual gains from consuming a good or service.

Front 6

Marginal utility

Back 6

The addition utility gained from consuming one extra unit of goods or services.

Front 7

Relationship between total utility and marginal utility

Back 7

Front 8

Adam Smiths diamond and water paradox

Back 8

"Nothing is more useful than water: but; scarce any thing that can be exchanged for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of goods may frequently be exchanged for it"- Adam Smith, The Wealth of Nations.

Front 9

Utility Maximisation constraints

Back 9

-Limited income, there are limits on the wealth and income. To truly maximise utility you need to buy it all.

-A given set of prices, consumers are price takers and must accept the market ruling prices.

-Budget constraint, the opportunity cost of choosing where to spend your income.

-Limited time, consumers can rarely consume more than one good at a time, limited room to store all goods for future consumption.

Front 10

Asymmetric Information

Back 10

When one party to a market transaction possesses less information relevant to the transaction.

Front 11

Adverse selection

Back 11

The seller knows more about the faults of the good for sale than the buyer, therefore the market ruling price is lowered to protect buyers from overpaying for defected goods.

Very similar to George Akerlof's second-hand car market.

"if he wants to sell, do I really want to buy?"

Front 12

Behavioural Economics

Back 12

A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions.

Front 13

Bounded rationality

Back 13

When making decisions individual's rationality is bounded by the information available to them, the limitations of their minds and the finite time available to make decisions.

Front 14

Bounded self-control

Back 14

Limited self-control in which individuals lack the self-control to act in what they see as their self-interest.

Front 15

Cognitive biases

Back 15

A mistake in reasoning or some other mental thought process occurring as a result of, for example, using rules-of-thumb or holding onto one's preferences or beliefs regardless of contrary information.

Front 16

10 Cognitive Biases

Back 16

-Status Quo Bias

-Memory Bias

-Ingroup Bias

-Observational selection Bias

-Positive selection Bias

-Post-purchase Rationalisation

-Neglecting probability

-Bandwagon effect Bias

-Current moment Bias

Front 17

Status Quo Bias

Back 17

People prefer things to remain the same so are biased against change.

Front 18

Memory Bias

Back 18

People remember emotional events more vividly and it affects what and how people remember.

Front 19

Ingroup Bias

Back 19

Doing similar things to people in your group, suspicious of things people not in your group do.

Front 20

Observational Bias

Back 20

Noticing something once and wrongly assuming it happens much more frequently.

Front 21

Positive expectation bias

Back 21

The sense that luck will eventually change for the better, e.g. gambling addictions.

"Bad luck must change eventually right?"

Front 22

Post-purchase rationalisation

Back 22

Believing that the purchase of a bad, expensive or faulty good was a good idea. Trying to justify bad ideas.

Front 23

Neglecting probability

Back 23

The inability to grasp a proper sense of risk leading to and overstating or understating of risks. e.g air travel vs car vs bike

Front 24

Negativity bias

Back 24

People tend to pay more attention to bad news rather than good news. Perceive negative news as being more important or profound.

Front 25

Bandwagon effect bias

Back 25

Succumbing to group think or herd behaviour.

Front 26

Current moment bias

Back 26

Preferring pleasure or satisfaction now rather than later. Pain can be left for later.

Front 27

Availability Bias

Back 27

Make judgements based on how easily you can remember examples of similar events.

Front 28

Anchoring

Back 28

People rely heavily on the first piece of information they find, the "anchor". Individuals use this piece of information when making subsequent decisions.

Front 29

Altruism

Back 29

Concern for the wellness of others.Not acting in your own self-interest.

Front 30

Choice Architecture

Back 30

A framework setting out different ways in which choices can be presented to consumers, and the impact on the consumers decision making.

Front 31

Framing

Back 31

How something is presented influences the choices people make.

Front 32

Mandated choice

Back 32

People are required to make a choice by law.

Front 33

Restricted choice

Back 33

Offering a limited number of options so that people are not overwhelmed by the complexity of the situation. If there are too many choices people make a poorly thought-out decision.

Front 34

Nudge

Back 34

Seek to lead people by providing them with information. Allows them to make their own choices.

Front 35

Shove

Back 35

Instruct people to behave in a certain way, often by offering a financial incentive to reward and a disincentive to punish.