Individual Economic Decision Making

• Rational economic decision making and economic incentives involve attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed.
• Traditional economic theory assumes that economic agents are utility maximisers and are rational.
• Utility theory includes total and marginal utility, and the hypothesis of diminishing marginal utility.
• The hypothesis of diminishing marginal utility states that for a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed.
• Behavioural economics may not yet have sufficient policy credibility.
• The demand curve is downward sloping because of diminishing marginal utility.
• The impacts of nudges are contextual, meaning what works in one country might not be as effective in another nation at different stages of economic development.
• Nudges policies seek to lead people by providing them with helpful information and language that then allows them to make an informed choice.
• Shove policies instruct people to behave in certain ways, often by their responding to financial incentives and disincentives that reward or punish different decisions.
• Government policies based on traditional economic theories have generally sought to shove people into altering their behaviour rather than to nudge them into the desired direction.
• The law of diminishing marginal utility suggests that consumer surplus generally declines with extra units consumed.
• Utility maximisation, it’s assumed that a rational individual will attempt to maximise their utility by comparing the costs and benefits of alternatives, and then choosing the option that maximises their net utility.
• Thinking at the margin means thinking about the effect of an additional action.
• An action could involve a marginal increase in product or a marginal cost.
• Thinking at the margin allows consumers to keep thinking ahead and prevents them from thinking about things they have already done, allowing them to consider how to maximise their utility now or in the future.
• When making choices, margins can also increase productivity, as the most important tasks which maximise utility the most, are the ones which are prioritised.
• Social awareness, such as awareness of health risks from smoking, gambling, is a social factor influencing demand.
• Social norms, changing norms of behaviour, such as demand for recycled bags, are also social factors influencing demand.
• Social pressures, such as peer pressures affecting demand for legal highs & other drugs, are also social factors influencing demand.
• Emotional factors, such as the demand for health insurance after major incidents, binge drinking, and eating at times of personal insecurity, are also factors influencing demand.
• Imperfect Information refers to the importance of information for decision making.
• Symmetric information means that consumers and producers have perfect market information to make their decision.
• Efficient allocation of resources requires all economic agents to have the information they need to make correct choices between alternatives.
• Traditional economic theories assume that everyone has perfect information and the ability to use this information to make a rational decision.
• Asymmetric information arises when either the buyer or the seller involved in a potential transaction knows something that is not observable to the other party.
• Asymmetric information can be linked with the principal-agent problem, where the agent makes decisions for the principal, but the agent is inclined to act in their own interests, rather than those of the principal.
• Asymmetric information can lead to a misallocation of resources, as consumers might pay too much or too little, and firms might produce the incorrect amount.
• Behavioural economics is a method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions.
• Bounded rationality is when making decisions, an individual’s rationality is limited by the information they have, the limitations of their minds, and the finite amount of time available in which to make decisions.
• Most consumers and businesses do not have sufficient information to make fully-informed judgements when making their decisions.
• The increasing complexity of products makes it difficult for consumers and businesses to make rational decisions.
• Bounded rationality suggests that consumers and businesses opt to satisfice rather than maximise.
• Consumers and businesses use rules of thumb and approximations when active in different markets.
• Bounded self-control is limited self-control in which individuals lack the self-control to act in what they see as their self-interest.
• Cognitive bias is a mistake in reasoning or in some mental thought process occurring as a result of using rules of thumb.
• Rules of thumb are simple tools that help an individual make a decision.
• Anchoring means placing too much emphasis on one piece of information.
• Value is often set by anchors or imprints in our minds which we then use as mental reference points when making decisions.
• Availability biases are where judgements are made about the probability of events occurring based on how easy it is to remember such events occurring.
• Social norms influence an individual’s behaviour, as their behaviour can be influenced by the behaviour of their social group.