1.2.1 rational decision making

What are the underlying assumptions of rational economic decision making?

• Consumers aim to maximise utility

• Firms aim to maximise profit

• Governments aim to maximise social welfare

What does it mean that consumers aim to maximise utility?

• Utility is the satisfaction gained from consuming a product.

• The rational consumer (Homo Economicus) calculates the utility from each decision and chooses the option which gives the most satisfaction.

What does it mean that firms aim to maximise profit?

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

What does it mean that governments aim to maximise social welfare and why is this assumption questioned?

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

However, economic agents do not always have the information necessary to act rationally and consumers do not always make calculated decisions.