Consumer is rational
Rational behavior refers to a decision-making process that is based on making choices that result in the optimal level of benefit or utility for an individual. Rational expectations are as much a concept to solve dynamic models as they are an assertion on people's behavior.
These decisions provide people with the greatest benefit or satisfaction — given the choices available — and are also in their highest self-interest.
For most of the Year 1 microeconomics course we assume that Rational consumers wish to maximize their satisfaction or utility from consumption by correctly choosing how to spend their limited income.
Why despite several decades of rising living standards, surveys of happiness suggest that actually, people are not noticeably happier than previous generations? Often decisions are based on incomplete information which causes a loss of welfare not only for people themselves and affect others and our society as a whole.
Some nomenclature: An alternative A is weakly preferred to another alternative B, if you either like A more than B or you are indifferent between the two.
Typically we assume that, when making decisions people aim to maximise their own welfare. In short, preferences are rational when they are defined for all possible alternatives, and when they don't contradict each other in obvious ways.
Rational consumer theory
Do we always engage in rational behaviour? Agents in a model have rational expectations if they use the model to form expectations about the future. Rational behavior does not necessarily require a person to attempt to get the highest return but rather the highest optimal benefit based on key factors for concern. The assumption of rational behavior implies that people would rather be better off than worse off. For most of the Year 1 microeconomics course we assume that Rational consumers wish to maximize their satisfaction or utility from consumption by correctly choosing how to spend their limited income. They are commonly used because they make sure that people are not systematically wrong about their beliefs, and they keep models' properties from being driven by more arbitrary assumptions on how people form expectations. Rational behavior is also the key assumption of rational choice theory RCT , an economic principle that assumes that individuals always make prudent and logical decisions that provide them with the highest amount of personal utility. What makes people happy? Behavioral finance attempts to model behaviors that on the surface appear irrational. But behavioural economics theories challenge the assumption of pure rationality in our decisions. This consideration can include making decisions based primarily on emotion, such as investing in a company for which the investor has positive feelings, even if financial models suggest the investment is not wise. In reality, when making day-to-day decisions, consumers rarely behave in a well-informed and fully rational way. Real World Example of Rational Behavior For example, an individual may choose to invest in the stock of an organic produce operation rather than a conventional produce operation if he or she has strong beliefs in the value of organic produce, even if the present value of the organic operation compared with that of the conventional operation indicates the conventional operation should earn a higher return. These decisions provide people with the greatest benefit or satisfaction — given the choices available — and are also in their highest self-interest. Individualized Rational Behavior Rational behavior does not necessarily require a person to attempt to get the highest return.
based on 47 review