Rational Expectations Model

The idea of rational expectations model is that rational expectations of the participants in an economy will partially affect the outcome of the economy in the future. If a company sees that the price for its product will be higher in the future, it will stop or slow the production until the price rises. If 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.