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36 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What is the difference between maximisation and satisficing |
Maximisation is getting the absolute most out of something Satisficing is when you are content with how much you’ve got out of something e.g. you’ve revised enough |
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Give 3 examples of economic agents |
Households, firms, governments, individuals |
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What is total utility |
The aggregate (total) amount of satisfaction an individual gets from consuming a good or service |
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What is Marginal utility |
The amount of satisfaction an individual gets from consuming an extra unit of a good or service |
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What is utility theory about |
The satisfaction and individual gets from consuming a good or service |
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What happens to total utility (TU) as more of a product is consumed |
TU Goes up or down |
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What is the formula for marginal utility |
Change in total utility / change in number of units consumed |
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As price falls , demand... |
Increases |
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When does utility maximisation occur |
When the consumer spends the last of their budget getting the same amount of marginal utility from each product |
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Because individuals have a budget, when is utility maximised ? |
MUx / Px = MUy / Py E.g. Marginal utility of choc divided by price of choc = marginal utility of drink divided by price of drink |
Formula |
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Why isn’t utility maximised when an individual doesn’t spend all their budget |
Because they can spend more to gain greater utility |
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Will a consumer choose an option if marginal benefit is less than marginal cost |
NO! |
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What happens to total utility when marginal cost is more than marginal benefit |
Total utility will fall , the individual will experience dissatisfaction |
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What is it called when one party has more or less relevant information than another |
Asymmetric information |
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What is information failure |
A type of market failure when consumers or producers have asymmetric information |
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Why is there likely to be information failure amongst customers at a supermarket |
They don’t know all the prices of the goods they want in all the shops - might buy something when they can get it cheaper elsewhere |
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What does behavioural economics look at |
The psychological reason people make decisions |
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What is altruism |
When people act in the internet of others at their own expense |
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Does traditional economic theory take altruism into account |
No |
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Bounded rationality suggest that when people make decisions they are limited by what 3 things: |
Information available Intellectual limitations Time available to make a decision |
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What does bounded self-control suggest |
Individuals have limited control over their decision making , so can choose things not in their best interest |
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What are social norms |
Rules of behaviour considered acceptable within a social group |
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Tversky and Kahneman named what 3 heuristics that can lead to irrational behaviour |
Availability Representativeness Anchoring and adjustment |
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What is an heuristic |
A rule of thumb that individuals use to make a judgement |
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What is representativeness |
Categorising based on past information rather than on information at hand (Gambler making a bet because they’re on a ‘run of good luck’) |
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What is anchoring and adjustment |
People can use random starting numbers to estimate a different number (Pop. Of Brazil higher or lower than 100m? What is the pop. Of Brazil?) |
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What is representativeness as an heuristic |
Categorising based on past information rather than on information at hand (Gambler making a bet because they’re on a ‘run of good luck’) |
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How is anchoring and adjustment and heuristic |
People can use random starting numbers to estimate a different number (Pop. Of Brazil higher or lower than 100m? What is the pop. Of Brazil?) |
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What is choice architecture |
Design of ways in which choices are presented to an economic agent This can have a big impact on decisions making |
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What is framing |
The way in which choices are presented |
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What is libertarian paternalism |
The idea that economic agents such as firms and governments can try to affect decision making whilst respecting freedom of choice , in order to improve their welfare |
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What are default choices |
Choices that a consumer will make as a standard procedure - their go-to choice. |
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What is loss aversion |
Making decisions based on avoiding loss rather than achieving gain |
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What is the paradox of choice |
Sometimes individuals simply have too much choice , making them feel overwhelmed |
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Why can restricted choice be a good thing |
Allows individuals to make more informed decisions, prevents the paradox of choice |
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What is mandated choice? Give an example |
When individuals are forced to make a decision E.g. UK driving license requires individuals to declare whether they’re willing to donate organs The individual still has freedom of choice but they must make the choice |
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