Why is rationality or irrationality so important to economic thought?

Answer 1

It is assumed in economics that people are generally rational. What this means is that people will not intentially make a choice that they know will make them worse off. Business will try and maximize their profits because if they are not maximizing their profits over time they will go out of business and will eventually will not be observed in the market. So basically we assume that people act rationally with the information they are given. There is also a principle called the "as if" principle which is a bit more complicated but could be found with a little digging of feel free to contact me and i will explain it. Hope that helps!

Answer 2

Well, they are so important because they are the basis of all consumer expenditure. When you buy anything you make a choice, when it be rational of irrational.

One such way of quantifying rationality is through the theory of diminishing marginal returns (or utility). This states: as more of a good is consumed, the less utility is derived from the each additional good. Therefore, consumers can be assessed to see whether their decisions have been made in a rational manner.

In regards to economic thought, rationality and irrationality are important because they determine whether the consumer has understood (or thought about) the consequence of the action (a purchase normally). And in economics, we look at the behaviour of consumers.

Answer 3

Unlike sciences, Economics have a large human component to it. Even though there are economic theories exist to explain how the markets and economies should function, it still requires a lot of human interference and interactions. This is in contrast to scientific principles such as gravity, magnetism and electricity. So, the human rationality as well as irrationality play a large role is economic theories. As an example, think about a stock price. In an open market it is always supposed to be perfectly priced (valued). However, it never does, it comes close to it and keeps on oscillating around its perfect value.

Answer 4

The basis for mathematics used in microeconomics is that people have utility function and they maximize their utility (this is what economist mean by rational). Using this the theory shows that perfect competition results in the optimal allocation of resources. Any deviation from this ideal undermines the results and prediction of economic theory.

Answer 5

My guess is that it is rational to assume that consumers are irrational.