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Rational Decision Making and Consumer Welfare

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Last updated 10 May 2022

The link between rational decision making and the consequences for consumer welfare are explored in this short revision video.

Rational Decision Making and Consumer Welfare

When building supply and demand models the assumption is made that consumers and producers act in a rational way to maximise their utility. The key aim of rational consumers is to maximise their own utility or satisfaction when making their choices. Often this might involve some cost-benefit calculation. - weighing up the benefits and costs of allocating some of their limited budget to different goods and services. Or deciding how much to save rather than spend in a given time period.

Consumer welfare refers to the outcomes for consumers from market activity. Consumer welfare can be illustrated using the concept of consumer surplus. Consumer surplus is highest at an equilibrium price where the price charged = the marginal cost of supply. However, firms with monopoly power can raise prices above a competitive level leading to a deadweight loss of consumer welfare. This means that there is a loss of allocative efficiency.

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