Utility is the satisfaction gained from consumption.

What does 'rational' mean in classical economic theory?

A rational agent considers the outcome of each choice, recognises its net benefits, and selects the option offering the highest benefits.

True or False? The Law of Diminishing Marginal Utility helps to explain why the demand curve is downward sloping.

True. As each additional unit offers less utility, consumers are only willing to pay a lower price, giving the demand curve its downward slope.

To calculate total utility, the marginal utility of each unit consumed is together.

To calculate total utility, the marginal utility of each unit consumed is added together.

Define marginal utility .

Marginal utility is the additional satisfaction gained from consuming one more unit of a product.

How are consumers assumed to act rationally?

Consumers are assumed to act rationally by maximising their utility .

Define the Law of Diminishing Marginal Utility .

The Law of Diminishing Marginal Utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit.

True or False? Total utility falls as soon as marginal utility begins to decrease.

False. Total utility keeps increasing even while marginal utility is decreasing, because each extra unit still adds some satisfaction.

What does it mean to 'decide at the margin'?

Deciding at the margin means weighing the marginal benefit of consuming one more unit against the marginal cost of that unit.

Define utility maximisation .

Utility maximisation is achieved when a consumer spends their limited income so as to gain the most satisfaction possible from it.

How are producers assumed to act rationally?

Producers are assumed to act rationally by selling goods and services in a way that maximises their profits .

A rational consumer keeps consuming until the marginal benefit of a unit equals its marginal .

A rational consumer keeps consuming until the marginal benefit of a unit equals its marginal cost .

Define symmetric information .

Symmetric information exists when buyers and sellers have exactly the same level of information about a good or service.

In the used car market, who typically holds more information?

There is asymmetric information , as sellers know more about the vehicle than the buyers do.

True or False? Information gaps exist in nearly all free markets and can lead to market failure.

True. Information gaps distort market outcomes, which results in market failure.

One assumption of free markets is that there is a flow of information.

One assumption of free markets is that there is a perfect flow of information.

Define asymmetric information .

Asymmetric information exists when buyers and sellers have different levels of information about a good or service.

What effect does asymmetric information have on socially optimal prices and quantities?

Asymmetric information distorts socially optimal prices and quantities, resulting in the over- or under-provision of goods or services.

True or False? Goods with dangerous side effects would be sold in higher quantities if buyers were fully aware of those effects.

False. They would be sold in lower quantities, so fewer factors of production should be allocated towards them.

Define information gap .

An information gap occurs when buyers or sellers lack full information, distorting market outcomes and causing market failure.

What happens to the quantity sold of a good with hidden extra benefits once buyers become aware of them?

It would be sold in higher quantities , so more factors of production should be allocated towards producing it.

Asymmetric information can lead to the over- or -provision of goods and services.

Asymmetric information can lead to the over- or under -provision of goods and services.

Define behavioural economics .

Behavioural economics is a field of study that combines elements of psychology and economics to understand how people make decisions and behave in economic contexts.

Which key assumption of traditional economics do behavioural economists question?

They question the assumption that individuals are rational decision-makers who always seek to maximise their utility.

Define bounded rationality .

Bounded rationality is the idea that people make decisions without gathering all the information needed to make a fully rational decision within the time available.

True or False? Too much choice can cause people to make irrational decisions.

True. An overload of choice, such as too many products in a supermarket, can make decisions harder and lead to irrational choices.

Define bounded self-control .

Bounded self-control is the idea that individuals have only a limited capacity to regulate their behaviour in the face of conflicting desires or impulses.

Supermarkets place a range of items at the register to encourage impulse purchases.

Supermarkets place a range of items at the checkout register to encourage impulse purchases.

What is anchoring bias?

Anchoring bias occurs when individuals rely too heavily on an initial piece of information (the 'anchor') when making later judgements or decisions.

Framing refers to how the presentation or wording of information can significantly influence people's choices, for example '80% fat free' rather than '20% fat'.

True or False? Availability bias leads people to overestimate the likelihood of events that come easily to mind.

True. People rely on readily available examples, such as avoiding flying after a plane crash despite the low probability of one.

Altruism is behaviour that benefits a group at the expense of the person performing it, such as giving charitable donations or volunteering.

The bias known as of thumb is when individuals make choices based on a default choice from experience.

The bias known as rule of thumb is when individuals make choices based on a default choice from experience.

Give an example of how the perception of fairness can drive a non-rational decision.

Some people buy the Big Issue even though they never read it, choosing to support the sellers because they value a fairer, more equitable outcome.

Define choice architecture .

Choice architecture refers to the intentional design of how choices are presented so as to influence decision-making.

What is a default choice in choice architecture?

A default choice occurs when an individual is automatically signed up to a particular option, so a decision is effectively made even if they take no action.

Define nudge theory .

Nudge theory is the practice of influencing the choices economic agents make by using small prompts to influence their behaviour.

Who coined the phrase 'nudge theory'?

Richard Thaler coined the phrase 'nudge theory' and argued that firms should use nudges in a responsible way.

True or False? Restricted choice widens the range of options available to individuals.

False. Restricted choice limits the options available, which helps individuals make more rational decisions.

The UK Behavioural Insights team's framework for nudging is known by the acronym .

The UK Behavioural Insights team's framework for nudging is known by the acronym EAST .

What does the 'S' in the EAST framework stand for?

The 'S' stands for Social , reflecting that individuals are influenced by what other people do rather than by rules and regulations.

Define mandated choice .

A mandated choice requires individuals to make a specific decision or take a particular action by imposing a requirement or obligation.

True or False? A key ethical criticism of nudges is that they can be manipulative because people are not fully aware of the intervention.

True. Nudges often operate behind the scenes, raising concerns about autonomy, consent and the potential for abuse.

Give one example of UK government nudge theory in action.

Workplace pension schemes automatically enrol eligible workers unless they choose to opt out, encouraging retirement saving.

Traffic light on food packaging nudge consumers towards healthier, more informed food choices.

Traffic light labelling on food packaging nudge consumers towards healthier, more informed food choices.

State one disadvantage of using choice architecture.

It can be seen as a form of manipulation , as it influences decisions without people's explicit consent and may infringe on free choice.

A LevelEconomicsAQAFlashcardsIndividuals, Firms, Markets & Market Failure2. Individual Economic Decision Making

2. Individual Economic Decision Making (AQA A Level Economics): Flashcards

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Cards in this collection (46)

Define utility.
Utility is the satisfaction gained from consumption.
What does 'rational' mean in classical economic theory?
A rational agent considers the outcome of each choice, recognises its net benefits, and selects the option offering the highest benefits.
True or False?
The Law of Diminishing Marginal Utility helps to explain why the demand curve is downward sloping.
True.
As each additional unit offers less utility, consumers are only willing to pay a lower price, giving the demand curve its downward slope.
To calculate total utility, the marginal utility of each unit consumed is together.
To calculate total utility, the marginal utility of each unit consumed is added together.
Define marginal utility.
Marginal utility is the additional satisfaction gained from consuming one more unit of a product.
How are consumers assumed to act rationally?
Consumers are assumed to act rationally by maximising their utility.
Define the Law of Diminishing Marginal Utility.
The Law of Diminishing Marginal Utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit.
True or False?
Total utility falls as soon as marginal utility begins to decrease.
False.
Total utility keeps increasing even while marginal utility is decreasing, because each extra unit still adds some satisfaction.
What does it mean to 'decide at the margin'?
Deciding at the margin means weighing the marginal benefit of consuming one more unit against the marginal cost of that unit.
Define utility maximisation.
Utility maximisation is achieved when a consumer spends their limited income so as to gain the most satisfaction possible from it.
How are producers assumed to act rationally?
Producers are assumed to act rationally by selling goods and services in a way that maximises their profits.
A rational consumer keeps consuming until the marginal benefit of a unit equals its marginal .
A rational consumer keeps consuming until the marginal benefit of a unit equals its marginal cost.
Define symmetric information.
Symmetric information exists when buyers and sellers have exactly the same level of information about a good or service.
In the used car market, who typically holds more information?
There is asymmetric information, as sellers know more about the vehicle than the buyers do.
True or False?
Information gaps exist in nearly all free markets and can lead to market failure.
True.
Information gaps distort market outcomes, which results in market failure.
One assumption of free markets is that there is a flow of information.
One assumption of free markets is that there is a perfect flow of information.
Define asymmetric information.
Asymmetric information exists when buyers and sellers have different levels of information about a good or service.
What effect does asymmetric information have on socially optimal prices and quantities?
Asymmetric information distorts socially optimal prices and quantities, resulting in the over- or under-provision of goods or services.
True or False?
Goods with dangerous side effects would be sold in higher quantities if buyers were fully aware of those effects.
False.
They would be sold in lower quantities, so fewer factors of production should be allocated towards them.
Define information gap.
An information gap occurs when buyers or sellers lack full information, distorting market outcomes and causing market failure.
What happens to the quantity sold of a good with hidden extra benefits once buyers become aware of them?
It would be sold in higher quantities, so more factors of production should be allocated towards producing it.
Asymmetric information can lead to the over- or -provision of goods and services.
Asymmetric information can lead to the over- or under-provision of goods and services.
Define behavioural economics.
Behavioural economics is a field of study that combines elements of psychology and economics to understand how people make decisions and behave in economic contexts.
Which key assumption of traditional economics do behavioural economists question?
They question the assumption that individuals are rational decision-makers who always seek to maximise their utility.
Define bounded rationality.
Bounded rationality is the idea that people make decisions without gathering all the information needed to make a fully rational decision within the time available.
True or False?
Too much choice can cause people to make irrational decisions.
True.
An overload of choice, such as too many products in a supermarket, can make decisions harder and lead to irrational choices.
Define bounded self-control.
Bounded self-control is the idea that individuals have only a limited capacity to regulate their behaviour in the face of conflicting desires or impulses.
Supermarkets place a range of items at the register to encourage impulse purchases.
Supermarkets place a range of items at the checkout register to encourage impulse purchases.
What is anchoring bias?
Anchoring bias occurs when individuals rely too heavily on an initial piece of information (the 'anchor') when making later judgements or decisions.
What is framing?
Framing refers to how the presentation or wording of information can significantly influence people's choices, for example '80% fat free' rather than '20% fat'.
True or False?
Availability bias leads people to overestimate the likelihood of events that come easily to mind.
True.
People rely on readily available examples, such as avoiding flying after a plane crash despite the low probability of one.
Define altruism.
Altruism is behaviour that benefits a group at the expense of the person performing it, such as giving charitable donations or volunteering.
The bias known as of thumb is when individuals make choices based on a default choice from experience.
The bias known as rule of thumb is when individuals make choices based on a default choice from experience.
Give an example of how the perception of fairness can drive a non-rational decision.
Some people buy the Big Issue even though they never read it, choosing to support the sellers because they value a fairer, more equitable outcome.
Define choice architecture.
Choice architecture refers to the intentional design of how choices are presented so as to influence decision-making.
What is a default choice in choice architecture?
A default choice occurs when an individual is automatically signed up to a particular option, so a decision is effectively made even if they take no action.
Define nudge theory.
Nudge theory is the practice of influencing the choices economic agents make by using small prompts to influence their behaviour.
Who coined the phrase 'nudge theory'?
Richard Thaler coined the phrase 'nudge theory' and argued that firms should use nudges in a responsible way.
True or False?
Restricted choice widens the range of options available to individuals.
False.
Restricted choice limits the options available, which helps individuals make more rational decisions.
The UK Behavioural Insights team's framework for nudging is known by the acronym .
The UK Behavioural Insights team's framework for nudging is known by the acronym EAST.
What does the 'S' in the EAST framework stand for?
The 'S' stands for Social, reflecting that individuals are influenced by what other people do rather than by rules and regulations.
Define mandated choice.
A mandated choice requires individuals to make a specific decision or take a particular action by imposing a requirement or obligation.
True or False?
A key ethical criticism of nudges is that they can be manipulative because people are not fully aware of the intervention.
True.
Nudges often operate behind the scenes, raising concerns about autonomy, consent and the potential for abuse.
Give one example of UK government nudge theory in action.
Workplace pension schemes automatically enrol eligible workers unless they choose to opt out, encouraging retirement saving.
Traffic light on food packaging nudge consumers towards healthier, more informed food choices.
Traffic light labelling on food packaging nudge consumers towards healthier, more informed food choices.
State one disadvantage of using choice architecture.
It can be seen as a form of manipulation, as it influences decisions without people's explicit consent and may infringe on free choice.

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