Individual economic decision making

• Utility theory:

  Measures value of satisfaction a consumer gets from consuming good/service.
• Law of Diminishing returns:

  as the quantity increases the lower the marginal utility derived from each unit decreases
• Total Utility:

  maximised where Marginal utility=0
• Lack of information:

  information is non-existent or not presented clearly.

  Which can lead to;

  consumers making irrational decisions
• Asymmetric Information:

  information exists but not shared equally between parties.

  Examples:

  Second Hand Market,

  Labour Markets.
• Behavioural Economics:

  disputes idea that consumers are rational and maximise utility and other factors affect decision.
• Behavioural Economics states:

  consumers are not always rational by:

  Bounded rationality: consumers are unable to maximise utility due to information finding too time consuming and too much choice available.

  Bounded Self-control: prevent taking a decision that will maximise utility ie not drinking fizzy drinks for health.

  Consumers follow rule of thumb (heuristics) to make satisfying decision.
• • Anchoring: reference price to compare prices
• Social norms- rules made by society ie tipping culture.
• Availability Bias- how easy to overestimate likelihood of an event occurring ie not swimming in Australia due to shark attacks
• Framing-idea that the way information is presented influences choice
• Loss Aversion- don’t like to give up something to invest due to possibility of losing it leading to:

  Endowment Effect- attaching too much monetary value to something compared to its gain