rational decision making and alternative views

what does neo-classical economic theory suggest

that economic agents make decisions in a rational way

consumers

• aim to maximise their economic welfare, measured by the utility from consuming a bundle of goods
• scarcity means that consumers need to consider the opportunity cost against the utility gained from consuming a good
• they may not have computational ability to calculate net benefits

workers

• aim to maximise their welfare at work
• may suffer form information gaps

firms

• aim to maximise profits
• not all owned by single owners therefore conflict between shareholders and managers

governments

• aim to maximise the welfare of its citizens by making decisions that increase the welfare of the country as a whole
• may be corrupt or favour its voters

what to neo classicalists suggest?

that agents calculate their net benefit at the margin
• they look at one decision in isolation rather than reviewing all decisions at once (MARGINAL ANALYSIS)

habitual behaviours

refers to the pattern that a consumer makes; a consumer continues to make the same decision because it is what they're used to

computational ability

consumers find it difficult to calculate the probability of something happening when purchasing items as they value their own

bounded rationality

limited by time factors

anchoring

comparing to previous experiences