1.2.1 rational Decision Making

Question 1

What are the underlying assumptions of rational economic decision making?

Answer 1

1. Consumers aim to maximise utility
2. Firms aim to maximise profit
3. Governments aim to maximise social welfare

Question 2

Explain how consumers aim to maximise utility

Answer 2

• utility is satisfaction gained from consuming a product
• rational consumer (Homo Economicus) makes decisions by calculating the utility gained from each decision and chooses the one which will give the most satisfaction

Question 3

Explain how firms aim to maximise profit

Answer 3

• 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 4

Explain how governments aim to maximise social welfare

Answer 4

• 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