Rational decision making

A) The underlying assumptions of rational economic decision making: Consumers aim to maximise utility, Firms aim to maximise profits.

When building supply and demand models the assumption is made that consumers and producers act in a rational way to maximise their utility. This means that producers aim to maximise their profits by producing at a point where the marginal cost = marginal revenue (supply line). It also means that consumers aim to maximise the utility/benefit that they derive from purchasing goods/services. This means that consumers will often consume up to the point where marginal cost = marginal utility. Marginal cost is also equal to the price that the consumer has to pay for the good/service.