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Rational decision making

a) The underlying assumptions of rational decision making

Consumers aim to maximise utility - utility is the satisfaction one gets from consuming a good or service. Supposedly, consumers make decisions based only on what will maximise utility most, however in reality such decisions are far more complex.

Firms aim to maximise profit - this is because economics assumes that all individuals are selfish, and seek to maximise their own monetary gain above all else.

Governments aim to maximise social welfare - the government's goal is to protect the rights of its citizens, and is incentivised to maximise their satisfaction so that they can be voted in again. However, this would only be the case in a free market democracy (linking back to 1.1.6); this may be why it isn't explicitly mentioned in the specification, BUT IT IS STILL IMPORTANT TO KNOW!


Even though it's not much, it forms the basis for all economic reasoning, so it is VERY important.

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