Sunday, August 4, 2019

Explain what is implied by the assumption that decision-makers are Essa

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 ... ...tility and therefore the amount of meals must decrease to keep the utility constant. Due to the fact that the consumer will prefer more to less the curve must slope downwards. The slope of each curve does get steadily flatter as we move to the right due to the assumption of a diminishing marginal rate of substitution. For example in this case at point A the consumer will sacrifice a lot of films for few meals because he/she has so many films. Whereas point B he/she has less films relative to meals so willing to sacrifice a smaller amount of films for additional meals. However this kind of economic analysis is based on rational behaviour of consumers. It does not take into account people with maybe addictions such as smokers or people under the influence of alcohol or drugs. In economics we assume rational thinking and behaviour will always take place.

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