1.2.1 Rational Decision Making

Question 1

What are the 3 main underlying assumptions of rational economic decision-making?

Answer 1

Consumers aim to maximise utility
Firms aim to maximise profit
Governments aim to maximise social welfare

Question 2

What is meant by consumers aiming to maximise utility?

Answer 2

It assumes that consumers make decisions by calculating the utility gained from each purchasing decision and choose the one which will give them the most satisfaction.

Question 3

What is meant by firms aiming to maximise profit?

Answer 3

Economic theory assumes that firms are run for their owners and shareholders so aim to maximise profit in order to keep the shareholders happy

Question 4

What is meant by governments aiming to maximise social welfare?

Answer 4

Governments are voted in by the public so they should aim to maximise their satisfaction by taking decisions which increase social welfare.