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Economic observation to predict future social and economic behavior.
The idea is that rational expectations in an economy will partially affect what happens to the economy in the future. If a company believes that the price for its product will be higher in the future, it will stop or slow production until the price rises. Because the company weakens supply while demand stays the same, price will increase. In sum, the producer believes that the price will rise in the future, makes a rational decision to slow production and this decision partially affects what happens in the future
At a basic level, it essentially means that ordinary individuals can correctly predict future economic behaviour and act in accordance with the said behaviour, even without fully understanding how or why. It also aims to prove that any errors as a result of applying the theory are random in nature.
