Rational decision making

• Behavioural economics is research that adds elements of psychology to traditional models in an attempt to better understand decision making by economic participants
• Incentives matter enormously in any study of microeconomics. For markets to work efficiently economic agents must respond to price signals from the market
• Income represent a flow of earnings from using factors of production to generate an output of goods and services
• Invisible hand- Created by Adam Smith which described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources to society’s best interest
• Market incentives are signals that motivate economic actors to change their behaviour
• Profit maximisation is the assumption that producers wish to produce an output that will create maximum profit levels
• Rational choice involves the weighing up costs and benefits and trying to maximise the surplus of benefits over costs
• Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service
• utility maximisation is the assumption that consumers behave rationally in allocating their limited budget between different products so as to maximise total satisfaction from their purchases