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Economics explained


Behavioral economics

Rational economic decision

Rational economic decision

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In a nutshell, economists assume that the basic motivation driving most people most of the time is a desire to be happy.

This assumption implies that people make choices on the basis of whether or not those choices are going to make them as happy as they can be given their circumstances.

Rational economic decision making and economic incentives

At the heart of traditional or orthodox demand theory is the assumption that the members of households or consumers always act rationally.

Rational behaviour means people try to make decisions in their self-interest or to maximise their private benefit.

When a choice has to be made, people always choose what they think at the time is the best alternative, which means that the second best or next best alternative is rejected.

Individuals are assumed to be rational in classical economic theory.
In the real world, however, we frequently witness irrational behaviour — decisions that do not maximise utility but can result in a loss of economic wellbeing.
Irrational behaviour is not limited to a few "irrational individuals," but can become the default behaviour for the majority of people in society (e.g., tulip mania/dot-com bubble).

Market failure, loss of economic welfare, and personal issues such as drug addiction and bad health can all result from irrational behaviour.

Irrational behaviour has ramifications for economic policy formulation.
It means economists need to take into account the potential for irrationality.

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