Question

Consider the following statement: "the problem with economics is that it assumes that consumers and firms always make the correct decisions. But we know that everyone makes mistakes." What is the most correct response to this statement?

Answer 1

Answer:

Economists do not assume that consumers and firms always make correct decisions, instead they assume that consumers and firms make rational decisions

Explanation:

This assumption that firms and consumers make rational decision is based on the economic rationality principle. The principle theorizes that people will usually consider actions, decisions and options based on logical thinking rather than other subjective elements such as morals, psychology and emotion. As a result of this principle economists assume that people will always make rational decisions.

The meaning of this is that consumers and firms would usually weigh the pros and cons of an issue before taking a decision and as described in the correct statement, rational decisions are logical decisions they do not necessarily mean they are correct decisions.

A consumer can make a logical decision to buy a product based on information made available but this may be a wrong decision because the information is misleading or wrong. It is a logical but incorrect decision.