1.2.1 Rational Decision-Making

Question 1

define a market

Answer 1

where consumers and producers come into contact with one another to exchange goods and services, a price is agreed for exchange to take place

Question 2

what is rational decision-making

Answer 2

a concept used to quantify the subjective preferences and choices of individuals about what to consume or how to allocate their resources

Question 3

how do firms and consumers do rational decision making

Answer 3

consumers allocate their income to maximise their utility from the goods and services they purchase.
firms use their resources to maximise profits from the goods and services they produce

Question 4

what is utility

Answer 4

the satisfaction, well-being or value that an individual derives from consuming goods and services

Question 5

which economic perspectives assume or criticise rational decision-making

Answer 5

assumed by neoclassical analysis but heavily criticised by behavioural economists

Question 6

what is neoclassical economics

Answer 6

an approach to economics that relates supply and demand to an individual’s rationality and his/her ability to maximise utility or profit

Question 7

what will a rational consumer do

Answer 7

allocate his/her income to maximise utility from the goods and services purchased
acting rationally requires a consumer to equate utility gained per pound spent on the last unit of each good or service

Question 8

which formula shows maximising consumer utility

Answer 8

utility- marginal utility of good A/price of good A = marginal utility of good B/price of good B

Question 9

what will rational firms do

Answer 9

use their resources to maximise profits from the goods and services produced so that owners and shareholders are kept happy

Question 10

what is maximum profit

Answer 10

this involves firms producing at the level of output when total revenue exceeds total costs by the largest amount

Question 11

what is profit

Answer 11

total revenue-total costs

Question 12

what are shareholders

Answer 12

owners of limited companies (bought shares)

Question 13

what will rational governments do and why

Answer 13

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 14

what are the four reasons for why consumers may not act rationally

Answer 14

consideration of other people’s behaviour
the importance of habitual behaviour
inertia
consumer weakness at computation

Question 15

explain consideration of other people’s behaviour as an evaluation of rational decision making

Answer 15

people are influenced by the actions of others - social learning theory

Question 16

explain the importance of habitual behaviour as an evaluation of rational decision making

Answer 16

frequency of past behaviours influence our current behaviour

Question 17

explain inertia as an evaluation of rational decision making

Answer 17

consumers may not make an active effort to change their actions - perhaps due to information overload or the complexity of information available e.g when choosing which bank has best rates

Question 18

explain consumer weakness at computation as an evaluation of rational decision making

Answer 18

people tend to pay more attention to recent events than distant events e.g a diet