1.2.1 Rational decision making

What does 'rational' mean in classical economic theory?

Rational in classical economic theory means that economic agents are able to consider the outcome of their choices and recognise the net benefits of each one.

How do consumers act rationally?

Consumers act rationally by maximising their total utility.

How do producers act rationally?

Producers act rationally by maximising their profits.

How do workers act rationally?

Workers act rationally by balancing their welfare at work by considering both pay and benefits.

What does it mean for governments to act rationally?

Governments act rationally by placing the interests of the people they serve first in order to maximise their welfare.

What is the assumption of rational decision making?

The assumption of rational decision making is that economic agents select the choice which presents the highest benefits.

Define the term 'economic agents'.

Economic agents are individuals or groups involved in economic transactions, such as consumers, producers, workers, and governments.

What effect does irrationality have on markets?

Irrationality distorts markets and produces fundamentally different outcomes than what would be achieved if all economic agents acted rationally.

Define 'utility' in the context of consumer rationality.

Utility is the satisfaction or benefit a consumer derives from consuming a good or service.

What is marginal utility?

refers to the additional satisfaction or utility gained from consuming one more unit of good or service