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Definition
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Answer
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Occurs when individuals compare the benefits and costs of alternative decisions and select the one that maximises their personal net benefit.
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Rational Economic Decision Making
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The measure of the satisfaction or happiness gained from the consumption of a good or service.
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Utility
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The aggregate sum of satisfaction or happiness that an individual gains from the consumption of a given amount of a good or service.
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Total Utility
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The additional satisfaction or happiness gained from the consumption of one more unit of a good or service.
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Marginal Utility
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The costs or benefits that influence economic agents to act in a certain way. These incentives are often, but not necessarily, financial.
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Economic Incentives
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States that, 'As consumption of a good increases, each additional unit of the good provides less utility than that provided by the previous unity.'
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Law of Diminishing Marginal Utility
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Occurs when a buyer or seller lacks the information needed to make the best choice in a transaction.
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Imperfect Information
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Occurs when both the seller and the buyer are well informed about the goods and services and prices in the market.
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Symmetric Information
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Occurs when either the seller or the buyer has more information than the other party in a transaction.
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Asymmetric Information
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An individual's ability to make a rational decision is restricted by factors such as the individual's inability to process and evaluate information, limited time in which to make the decision, and imperfect information.
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Bounded Rationality
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Individuals may not make rational decisions, even where they are aware of their irrational actions, because they lack self-control.
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Bounded Self-Control
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Describes a situation in which an individual has a mental tendency or inclination towards a particular preference. Consequently, any decisions influenced by these biases are unlikely to be purely rational, even though the individual might believe that they are weighing up the pros and cons of the decision.
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Biases in Decision Making
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General principles to help an individual make decisions, where the principles are based on experience or practice rather than calculation or evidence.
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Rules of Thumb
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A bias caused by individuals relying too much on an individual piece of information when making a decision.
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Anchoring
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Occurs when people make judgements about the probability of an event happening, they are heavily influenced by situations that they can remember.
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Availability Bias
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Rules of behaviour that are considered acceptable within a group or society.
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Social Norms
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The disinterested and selfless concern for the wellbeing of others.
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Altruism
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The term used to describe the different ways in which choices can be presented to consumers or individuals.
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Choice Architecture
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Occurs when the choices are presented in a way that is intended to encourage a given response.
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Framing
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Ways of influencing individuals' choices in a particular direction, but without removing their freedom of choice.
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Nudges
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The decision that is made if an individual takes no action.
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Default Choice
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When individuals can only select from a limited range of options.
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Restricted Choice
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Occurs when people are required by law to make a certain decision.
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Mandated Choice
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