1.2.1 Rational decision making

Question 1

What do we assume when making S+D models?

Answer 1

When building supply and demand models we make assumptions about consumers and producer as economic agents who seek to maximise their utility

Question 2

Bounded Rationality:

Answer 2

Bounded rationality is the idea that our decision-making capacity of humans cannot be fully rational because of the limits we face.

Question 3

What are the limits which cause bounded rationality?

Answer 3

• Information Failure: there may not be enough information, or it may be unreliable, or maybe not all possibilities or consequences have been considered
• The amount of time we have to make decisions
• The limits of the human brain to process every piece of information and consider every possibility.

Question 4

What factors affect rationality?

Answer 4

• Consideration of the influence of others behaviour (social norms, herd behaviour, peer pressure)
• Habitual Behaviour and inertia
• Consumer weakness at computation/bounded rationality