1.2.1 - Rational decision making

Question 1

What is the first underlying assumption of rational economic decision making ?

Answer 1

Consumers aim to maximise utility:
Utility is the satisfaction gained from consuming a product.
The rational consumer is called Homo Economicus, who makes decisions by calculating the utility gained from each decision and chooses the one which will give them the most satisfaction.

Question 2

What is the second underlying assumption of rational economic decision making ?

Answer 2

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

Question 3

What is the third underlying assumption of rational economic decision making ?

Answer 3

Governments aim to maximise social welfare: Governments are voted in by the public and work for the public, so should aim to maximise their satisfaction by taking decisions which increase social welfare.

Question 4

Explain reasons why consumers may behave irrational

Answer 4

Social norms (herd behavou) - We are following what the rest of the group and society are doing.