Rational Decision Making

Economics: Edexcel A A Level, topic 1.2.1

Rational Agents

Rational agents are agents (people, governments or companies/producers) who use utility theory to guide their decision-making.

A rational agent wants to maximise their utility.
To do this, they will try to maximise their total utility.
A rational consumer will want to consume something up until the point where marginal utility and price are equal.

Traditional theory says that firms will try and maximise profits, and this is how most of their utility is gained.
Reasons for wanting to maximise profit include:
Survival.
To reinvest profits.
To offer managers and staff members better rewards.
In a world of asymmetric information, firms may have other objectives too, such as:
Maximising revenue.
Maximising market share (and gaining monopoly power).
Ethical objectives (e.g. supporting the local economy).

Governments should act in ways that best serve the population and, roughly speaking, try to maximise overall welfare.
This includes:
Achieving economic growth.
Reducing inflation.
Reducing or eliminating unemployment.
Achieving a balance between payments in and payments out (equilibrium).

Consumers are said to act rationally and maximise utility within the limits of their income.
Different consumers will have different interpretations of utility. One consumer might prioritise financial security (e.g. in saving for a property). Another consumer might want flashy clothes.
Consumers may also want to maximise their work-life balance (i.e. maximising their income while enjoying as much free time as they can). Consumers act as workers when they do this.