1.2.1 Rational decision making Flashcards
What does ‘rational’ mean in economic theory?
In classical economic theory, the word ‘rational’ means that economic agents are able to consider the outcome of their choices and recognise the net benefits of each one. Rational agents will select the choice which presents the highest benefits.
How do consumers act rationally?
Consumers are assumed to act rationally. They do this by maximising their utility.
How do producers act rationally?
Producers are assumed to act rationally. They do this by selling goods/services in a way that maximises their profits.
How do workers act rationally?
Workers are assumed to act rationally. They do this by balancing welfare at work with consideration of both pay and benefits.
How does the government act rationally?
Governments are assumed to act rationally. They do this by placing the interests of the people they serve first in order to maximise their welfare.
How could the assumption of rational decision making be flawed?
In many ways, the assumption of rational decision making is flawed. For example, consumers are often more influenced by emotional purchasing decisions than a rational computation of net benefits.
