Matthew Swain ECON2233 - Reading Assignment

Irrational behavior and Economic Theory (Becker 1962) investigates the impact of irrational
consumers on the fundamental economic theory of utility optimisation and the resulting
downward sloping demand curve. When consumers and firms act irrationally by making
purchase decisions based on impulse and past purchases they lose out on potential utility.
The assumption of a downward sloping demand curve enables firms and the government to
make pricing decisions with a systematic response in demand to follow, invaluable in
practical scenarios. Many critics have claimed that irrational actors contravene this
fundamental theory of a downward sloping demand curve. The paper recognises that
irrational actors do exist, but necessarily at the detriment to the downward sloping demand
curve.
Becker breaks irrational consumers into impulsive and
habitual consumers. Under his model chance
determines impulsive consumers demand while past
purchases, where possible determine that of habitual
consumers. An increase in price of good X causes a
shift in the budget line from AB to CD where the new
opportunity set offers greater opportunity to consume Y
and less of X. Habitual consumers who previously
consumed along the budget curve between pB no
longer can as it lies beyond their income constraint,
forcing them to decrease their consumption of X. These
consumers, even if all others remained inert would force the average demand for X to fall,
affirming the downward sloping curve. A large group of impulsive consumers, due to the
randomness of their consumption along the budget line would result in an average
consumption at the midpoint. After the change in opportunity sets, that midpoint shifts from p
to p’ with a lower consumption of X again. In regard to firms, Becker puts forward the idea
that they are in fact constrained by a similar budget curve on the basis of the survival
argument; a firm can only spend their profits on inputs, or they will be eventually forced out
of the market. As such can be treated similarly to consumers. The paper concluded that
while irrational actors may exist, they don’t do so at the expense of traditional economic
theory. Inevitably, as opportunity sets shift, consumers will divert away from goods
increasing in price, regardless of rationality.

The idea that everyone’s decisions are purely based upon utility maximisation is
understandably flawed, no individual can be seen as perfect economic actors. Personally,
day-to-day decisions are commonly driven by previous purchases and in some cases

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 Matthew Swain ECON2233 - Reading Assignment

completely random. The true consumer must lie somewhere between the two extremes.
With both rational and irrational yielding downward sloping, the true demand curve must
therefore be negatively inclined too. The model is however restricted by the confines of
solely two goods. In any case where a consumer’s preferences do not follow a transitive
order, the model fails to predict towards which good the consumer will substitute, only that
demand for the good whose price has risen will fall. Additionally, irrational behaviour takes
many iterations, not just the two put forward. For example, the lack of self-control is a human
characteristic heavily investigated by R. Thaler. In cases of intertemporal choice rational
behaviour comes into question as holding out for future benefit is outweighed by immediate,
yet smaller utility. A time gap between the purchase of the two goods may mean the model
fails to replicate same downward sloping demand curve.

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