Rational decision making
Economic models often assume that consumers and producers make rational decisions. Consumers aim to maximise the utility they receive, while firms aim to maximise profit.
The standard economic assumption is that consumers choose the option which gives them the greatest utility, while producers make decisions which maximise their profits.
A) The underlying assumptions of rational economic decision making
When building supply and demand models, economists often assume that consumers and producers behave rationally.
Producers are assumed to aim to maximise profit. This means that a firm will produce up to the point where its marginal cost is equal to its marginal revenue.
Consumers are assumed to aim to maximise the utility, or benefit, that they receive from purchasing goods and services.
A rational consumer will therefore consume up to the point where the marginal utility from another unit is equal to the marginal cost of purchasing it. For the consumer, this marginal cost is the price that has to be paid for the good or service.
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AS Edexcel Economics Revision Guide
Continue with the complete AS revision guide, covering Themes 1 and 2 with detailed topic-by-topic explanations and economic diagrams.