The Underlying Economic Assumptions (Edexcel IGCSE Economics)

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 and 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