Rational individual

Examples of Rational individual in the following topics:

• Theory of Utility

  • The theory of utility is based on the assumption of that individuals are rational.
  • In economics, an individual is "rational" if that individual maximizes utility in their decisions.
  • Rather, this means that a rational individual is one who always selects that option that they prefer the most .
  • It is important to emphasize how rationality relates to a person's individual preferences.
  • If we could not assume rationality, it would be impossible to say what, when presented with a set of choices, an individual would select.

• Individuals Face Opportunity Costs

  • Individuals face opportunity costs when they choose one course of action over another.
  • Individuals face opportunity costs in both economic and non-economic decisions.
  • Rational individuals will try to minimize their opportunity costs.
  • This makes sense: individuals should seek to get the most and give up the least.
  • As economic actors, individuals face opportunity costs as well.

• The Tragedy of the Commons

  • The tragedy of the commons is the overexploitation of a common good by individual, rational actors.
  • The tragedy of the commons is the depletion of a common good by individuals who are acting independently and rationally according to each one's self-interest.
  • Each individual fisherman, acting independently, will rationally choose to catch some of the fish to sell.
  • If individuals have enlightened self-interest, they will realize the negative long-term effects of their short-term decisions.

• Assumptions

  • People have rational preferences among outcomes that can be identified and associated with a value.
  • Individuals maximize utility (as consumers) and firms maximize profit (as producers).
  • For example, economists assume that individuals are rational and maximize their utilities.
  • However, using the assumption that all people are rational enables economists study how people make choices.
  • Examples of such assumptions include perfect information, profit maximization, and rational choices.

• Behavioral Economics: Irrational Actions

  • Behavioral economics is the study of the effects of social, cognitive, and emotional facts on the financial decisions of individuals and institutions.
  • Behavioral economics focuses on the bounds of rationality of economic agents.
  • Market inefficiencies: include the study non-rational decision making and incorrect pricing.
  • Behavioral economics focuses on the study of how and why individuals and institutions make economic decisions .
  • This graph shows the three stages of rational decision making that was devised by Herbert Simon, a notable economist and scientist.

• Relationship Between Expectations and Inflation

  • There are two theories of expectations (adaptive or rational) that predict how people will react to inflation.
  • There are two theories that explain how individuals predict future events.
  • The theory of adaptive expectations states that individuals will form future expectations based on past events.
  • The theory of rational expectations states that individuals will form future expectations based on all available information, with the result that future predictions will be very close to the market equilibrium.
  • In essence, rational expectations theory predicts that attempts to change the unemployment rate will be automatically undermined by rational workers.

• Market Exchange and Efficiency

  • Individuals voluntarily contract among themselves.
  • The individuals exchange goods that are characterized by nonattenuated property rights.
  • Under these conditions, from a utilitarian perspective, no one would rationally engage in a voluntary exchange if it made them worse off.
  • Individual agents know their preferences (objectives) and react to any changes by altering their choices.
  • Since exchanges are perceived to be voluntary, no individual would choose to make themselves worse off.

• Introduction to Optimization and Markets

  • One of the basic precepts of Neoclassical microeconomics is that voluntary markets for goods with nonattenuated property rights will provide the information and incentives that coordinate individual behavior to achieve the maximum utility for society.
  • Rational choices require three basic steps:

• Economic Decisions

  • At a technical level, economic analysis is used to evaluate rational decisions.
  • Individuals only need to know about their own preferences and feasible alternatives.
  • Information about the objectives and feasible alternatives is necessary if "rational choices" are to be made.
  • A rational choice requires that the alternative that "best" satisfies the objective be selected.
  • There are three fundamental steps to the process of making "rational" economic choices:

• Price Ceiling Impact on Market Outcome

  • If a ceiling is to be imposed for a long period of time, a government may need to ration the good to ensure availability for the greatest number of consumers.
  • One way the government may ration the good is to issue ticket to consumers.
  • If individuals who value the good most are not capable of purchasing it, there is a potential for a higher amount of dead weight loss.