Study Notes
Rational decision making in economics assumes that consumers aim to maximise utility and firms aim to maximise profits. However, various factors can lead to irrational decisions by both consumers and producers.
- Rational Decision Making — Making choices that maximise utility or profit based on logical evaluation. Example: A consumer choosing the cheapest option for the same quality product.
- Utility — The satisfaction or benefit derived from consuming a product. Example: Enjoying a cup of coffee.
- Demand Curve — A graph showing the relationship between the price of a good and the quantity demanded. Example: As the price of coffee increases, the demand decreases.
- Law of Demand — States that there is an inverse relationship between price and quantity demanded. Example: Higher prices lead to lower demand.
- Marginal Utility — The additional satisfaction from consuming one more unit of a good. Example: The enjoyment from a second cup of coffee is less than the first.
Exam Tips
Key Definitions to Remember
- Rational Decision Making
- Utility
- Demand Curve
- Law of Demand
- Marginal Utility
Common Confusions
- Confusing shifts in the demand curve with movements along the curve
- Misunderstanding the difference between normal and inferior goods
Typical Exam Questions
- What is rational decision making? Rational decision making involves choosing the option that maximises utility or profit.
- How does the law of demand affect consumer behavior? As prices increase, the quantity demanded decreases, and vice versa.
- What factors can cause a shift in the demand curve? Changes in income, tastes, and the prices of related goods.
What Examiners Usually Test
- Understanding of the demand curve and its shifts
- Application of the law of diminishing marginal utility
- Ability to distinguish between rational and irrational decision making