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HERFINDAHL INDEX: A measure of concentration of the production in an industry that's calculated as the sum of the squares of market shares for each firm. This is an alternative method of summarizing the degree to which an industry is oligopolistic and the relative concentration of market power held by the largest firms in the industry. The Herfindahl index gives a better indication of the relative market control of the largest firms than can be found with the four-firm and eight-firm concentration ratios.

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RATIONAL BEHAVIOR:

The notion that people make decisions based on the desire to obtain the greatest amount of satisfaction. Rational behavior essentially means that people prefer more to less. The presumption of rational behavior underlies most economic analysis, especially that applied to consumer demand theory.
Rational behavior is a key assumption used in the study of economics and the choices that people make in pursuit of satisfaction. It builds on the basic premise that people, given the choice, would rather have more than less, that they would rather be better off than worse off.

Consider a few examples of rational behavior.

  • Pollyanna Pumpernickel, a mother of two, decides to purchase a 16 ounce bag of Double Dot Caramel Nougat Clusters at the MegaMart Discount Super Center for $1.29 rather than paying $1.79 for a 12 ounce bag at the Curious Curt's Convenience Corner.

  • Manny Mustard, owner and proprietor of Manny Mustard's House of Sandwich, decides to increase production and raise the price of his popular Deluxe Club Sandwich because it is becoming increasingly popular and his customers are buying more.

  • Professor Grumpinkston, of the Ambling Institute of Technology, decides to use the same textbook for his course in the spring semester as the fall semester so that he does not have to prepare a new set of lecture notes.

  • Roland Nottingham, a registered voter, decides not to vote in the Shady Valley mayoral election because the incumbent mayor, Victor Thurgood is the only candidate and he needs to spend election day mowing and fertilizing his yard before the rain comes.
In each case, the chosen option is the rational course of action that leads to an improvement in satisfaction for the decision maker. The choice generates more satisfaction rather than less.

Maximizing Utility

The specific phrase used to capture the notion of rational behavior is utility maximization. The utility part of this phrase means the satisfaction of wants and needs. The maximization part means reaching the greatest level possible.

This utility maximization assumption is primarily used in the context of consumer demand theory. This theory analyzes consumer buying choices with a keen eye on explaining and understanding the demand curve, the law of demand, and the demand side of the market.

More Than Money

The notion of rational behavior is occasionally misinterpreted to mean that people only seek monetary or material benefits, and that their decisions only apply to market activity. Rational behavior applies to all sorts of decisions, whether or not markets are involved and whether or not the benefits are monetary or material.

In other words, it is entirely rational for a person to choose nonmonetary rewards over material benefits. Suppose, for example, that Johnathan McJohnson quits his high-paying job with OmniConglomerate, Inc. to pursue a career as a pantomime artist. The monetary rewards are substantially less as a pantomime artist, but Johnathan really, really likes performing pantomime. He gains enormous nonmonetary benefits from this activity. While his family and friends suspect that Johnathan is crazy (or irrational), his choice reflects rational behavior based on the benefits he receives.

<= RATIONAL ABSTENTIONRATIONAL IGNORANCE =>


Recommended Citation:

RATIONAL BEHAVIOR, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: June 29, 2022].


Check Out These Related Terms...

     | economic thinking | economic analysis |


Or For A Little Background...

     | economics | scarcity | satisfaction | second rule of subjectivity | normative economics | assumption | unlimited wants and needs |


And For Further Study...

     | demand | supply | economic science | allocation | utility maximization | profit maximization | consumer demand theory | utility analysis |


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