Rational Decision Making (Edexcel A Level Economics A)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Rational Decision Making
When analysing markets, a range of assumptions are made about the rationality of economic agents involved in the transactions
In classical economic theory, the word 'rational' means that economic agents are able to consider the outcome of their choices and recognise the net benefits of each one. Rational agents will select the choice which presents the highest benefits
Consumers are assumed to act rationally. They do this by maximising their utility
Producers are assumed to act rationally. They do this by selling goods/services in a way that maximises their profits
Workers are assumed to act rationally. They do this by balancing welfare at work with consideration of both pay and benefits
Governments are assumed to act rationally. They do this by placing the interests of the people they serve first in order to maximise their welfare
In many ways, the assumption of rational decision making is flawed. For example, consumers are often more influenced by emotional purchasing decisions than a rational computation of net benefits
Examiner Tips and Tricks
In your examinations, the data-response and essay questions test your ability to think critically. The command words for these questions are evaluate, discuss, assess, or examine.
One way in which you can demonstrate critical thinking is to challenge the underlying assumptions of economic theory. The idea of rational decision making is one such assumption. Do consumers act rationally when they make impulse purchases? Do workers act rationally when they accept terrible working conditions for mediocre pay? Do governments actually maximise public welfare or do they implement policies that mainly benefit their core voter base?
Irrationality distorts markets and produces fundamentally different outcomes than what would be achieved if all economic agents acted rationally.
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