1.2.1 Rational Decision Making (copy)

Utility

The satisfaction or well-being that individuals derive from consuming goods and services.

Rational consumers

Consumers who seek to maximize their overall utility from consumption choices.

Profit

The difference between a firm's total revenue and its total costs.

Rational firms

Firms that aim to maximize their profits to ensure business sustainability and growth.

Consumer decision-making

The process by which consumers make choices based on their preferences and budget constraints.

Firm decision-making

The process by which firms produce goods and services to meet consumer demand and adjust production levels and pricing to achieve the highest profit.

Real-world application

The evaluation of factors like price, features, and brand reputation by rational consumers to maximize utility in purchasing decisions.

Critiques of the assumptions

Arguments against the assumption that consumers and firms always behave rationally due to bounded rationality, cognitive biases, and imperfect information.

Importance of the assumptions

The foundational concepts of utility maximization for consumers and profit maximization for firms in economics, providing a framework for understanding and analyzing economic decision-making in various contexts.

Bounded rationality

The idea that individuals have limited cognitive abilities and information, leading to deviations from perfect rationality in decision-making.

Cognitive biases

Systematic errors in thinking that can influence decision-making, leading to deviations from rational behavior.

Imperfect information

The lack of complete and accurate information available to consumers and firms, affecting their ability to make fully rational decisions.

Market outcomes

The results and consequences of economic decisions made by consumers and firms in the marketplace.