a) Rational decision making

a) The underlying assumptions of rational economic decision making:

• consumers aim to maximise utility

• firms aim to maximise profits

Economists assume economic agents make rational decisions

• Making rational decisions means making choices depending on the net benefits of each option

• Consumers make rational decisions by attempting to maximise the utility from their choices

  • Utility = the satisfaction gained from a good or service

• Firms make rational decisions by attempting to maximise the profit from their choices

• Governments make rational decisions by attempting to serve the people to maximise their welfare