Explain what is implied by the assumption that decision-makers are rational?
Explain what is implied by the assumption that decision-makers are rational?
How is the assumption of rationality used in the economic analysis of individual behaviour?
In many academic disciplines much is spoken about rationality and rational choices. Economists generally refer to 'rational' choices and that individuals in economic theory are rational. By rational we mean people choose options which they perceive to be the best, given the circumstances they are in. In terms of making rational choices some of the conceivable options for example of going to work would be:
* Actually going to work.
* Staying at home
* Going out shopping
* Buying a house
* Fly to the moon etc.
But with these choices we face constraints and it is these constraints that define our 'feasible' options so flying to the moon would not be a feasible option. Therefore the options we can choose from is called the 'feasible set' and it is our preferences i.e. our likes and dislikes and their relative intensity, which determines which feasible option we choose. When we make a choice it generates 'utility' which is a measure of the emotional experience associated with the outcome of a choice so basically the satisfaction from the consumption of a good. We talk about 'total utility' meaning the total satisfaction a person gains from all units of a commodity consumed within a time period. We also use the term 'marginal utility' which is additional satisfaction gained from consuming one extra unit within a time period. There is a general model of rational choice where economists assume that agents such as decision makers will firstly identify a feasible set of options and then assess the expected utility of each option and therefore choosing the option which gives the highest expected utility. Economists assume that agents are 'utility maximisers'.
How is the assumption of rationality used in the economic analysis of individual behaviour?
In many academic disciplines much is spoken about rationality and rational choices. Economists generally refer to 'rational' choices and that individuals in economic theory are rational. By rational we mean people choose options which they perceive to be the best, given the circumstances they are in. In terms of making rational choices some of the conceivable options for example of going to work would be:
* Actually going to work.
* Staying at home
* Going out shopping
* Buying a house
* Fly to the moon etc.
But with these choices we face constraints and it is these constraints that define our 'feasible' options so flying to the moon would not be a feasible option. Therefore the options we can choose from is called the 'feasible set' and it is our preferences i.e. our likes and dislikes and their relative intensity, which determines which feasible option we choose. When we make a choice it generates 'utility' which is a measure of the emotional experience associated with the outcome of a choice so basically the satisfaction from the consumption of a good. We talk about 'total utility' meaning the total satisfaction a person gains from all units of a commodity consumed within a time period. We also use the term 'marginal utility' which is additional satisfaction gained from consuming one extra unit within a time period. There is a general model of rational choice where economists assume that agents such as decision makers will firstly identify a feasible set of options and then assess the expected utility of each option and therefore choosing the option which gives the highest expected utility. Economists assume that agents are 'utility maximisers'.