Individual economic decision making

• What does utility theory focus on?

  Total and marginal utility
• What do consumers aim to maximize in economic decisions?

  Utility
• What do firms aim to maximize?

  Profits
• What is a consumer's utility?

  Total satisfaction from consumption
• What is marginal utility?

  Extra satisfaction from one additional unit
• Why is the demand curve downward sloping?

  Due to diminishing marginal utility
• What does the law of diminishing marginal utility suggest?

  Consumer surplus declines with extra units consumed
• What is utility maximization for consumers?

  Generating the greatest utility from decisions
• What is assumed about economic agents' actions?

  They act in their own interests
• What might philanthropic owners of firms aim to maximize?

  The utility of others
• How do economic agents respond to incentives?

  They allocate scarce resources efficiently
• What is the incentive for entrepreneurs in firms?

  Profit
• What are rewards in economic terms?

  Positive incentives for consumers
• What happens when incentives are not properly given?

  Resources will be misallocated
• What do prices in market economies provide?

  Signals to buyers and sellers
• What does high demand and price for a good incentivize firms to do?

  Allocate more resources to production
• What do entrepreneurs want to avoid?

  Loss
• What motivates entrepreneurs to innovate?

  To gain profit and reduce costs
• How can firms make decisions?

  Using intuition or rationally
• What does intuition in decision making rely on?

  Feelings or instincts
• What is a rational decision based on?

  Analysis and facts
• What are the steps in rational decision making for firms?

  1. Identify the problem
  2. Find and identify decision criteria
  3. Weigh the criteria
  4. Generate alternatives
  5. Evaluate alternative options
  6. Choose the best alternative
  7. Carry out the decision
  8. Evaluate the decision
• What is a limitation of rational decision making?

  It takes longer than intuitive decisions
• What does thinking at the margin involve?

  Considering the effect of an additional action
• Why is thinking at the margin important?

  It helps maximize current or future utility
• What does symmetric information mean?

  Perfect market information for decisions
• What can imperfect information lead to?

  Misallocation of resources
• What is asymmetric information?

  Unequal knowledge between consumers and producers
• How can asymmetric information lead to market failure?

  It causes misallocation of resources
• What is the principal-agent problem?

  Agents acting in their own interests
• How can information be made more widely available?

  Through advertising or government intervention
• What does bounded rationality suggest?

  Decision makers have limitations in choices
• What is the Administrative Man theory?

  A model recognizing decision-making limitations
• What does bounded self-control imply?

  Consumers struggle with self-control in decisions
• How does the law of diminishing marginal utility relate to consumption?

  Each extra unit consumed provides less benefit
• What is procrastination in consumer behavior?

  Delaying saving for long-term benefits
• What are heuristics in decision making?

  Shortcuts to simplify decision processes
• How do social norms influence consumer behavior?

  They create biases in decision making
• What is anchoring in decision making?

  Relying on the first piece of information
• How does availability bias affect consumers?

  It leads to overestimating rare events