Unit 1: Rational decision making

• How do customers make choices?

  With the aim of maximising utility from buying goods using a limited budget
• How do businesses make choices?

  With the aim of maximising profits using a limited budget
• Utility meaning


  Satisfaction
• Rational meaning


  When economic agents are able to consider the outcome of their choices and recognise the benefits of each one.
• What are rational decisions/choices based on?

  The option that has the highest benefits.
• Why is the concept of rational decision making flawed?

  People are influenced by many other factors when making decisions
• What factors influence rational decision making?

  Influence of other's behaviour (copying), habits, limited information to comprehend options due to lack of necessary knowledge, limited time to consider all options, and limited mental capacity to consider every option
• How does the 'influence of other's behaviours' affect rational decision-making?

  Through peer pressure, consumers are influenced by seeing others use or do something, forms of advertising such as influencers result in emotional decisions and behavioural psychology techniques to influence consumer choices
• How does habitual behaviour affect rational decision making?

  Through the rule of thumb which consists of making a quick estimation of benefits without much information, using information from the past, and consumer inertia.
• What is consumer inertia?

  Buying the same products although better options exist due to convenience
• How does weakness in computation affect rational decision-making?

  People set standards for what constitutes as a good-enough option, and they take the first option which passes that standard even if something better exists