Rational Consumer Choice:

Critique of the maximising behavior

of consumers (HL)
• Chapter objectives
• By the end of this chapter you be able to
understand:
• The assumptions behind rational consumer
choice: consumer rationality, utility
maximisation and perfect information
• The limitations of the assumptions of
consumer choice in terms of behavioural
economics: biases, bounded rationality,
bounded selfishness etc.
 Rational decision making
 Standard economic theories are based on the
assumption of rational self interest or rational
economic decision making.
• This means that consumers and producers act in
their best self interest to maximize the benefit that
they receive from economic decisions.
• E.g. Producers act to maximize profits and individuals
act to maximize utility or the satisfaction received
from consuming a good or services
• Rational choice theory states that individuals use
logical and sensible reasons when they buy goods
and services.
• Rational consumer choice:
• refers to the decision-making process based on
people making choices that result in the optimal
or maximum level of benefits or utility for an
individual.
• Based on this theory:
• Consumers buy more of a product when the price
falls
• IB students who work hard are more likely to pass
their exams and secure a place at university.
• Workers look for jobs with the highest paying
wage …. Etc.
• Investors on the stock exchange try to get their
highest possible
 Assumptions of rational consumer choice
• According to rational consumer choice, consumers
purchase goods and services based on the following
assumptions:
I. Consumer rationality:
a. Consumers are able to rank their goods according to
their preferences
• E.g. Prefer Coke, then Fanta etc.
• This is called the completeness assumption
b. The consumer always prefers more to less of a good
or service
• This is called the non-satiation assumption
c. Preferences among alternative choices are consistent
• This is called the transitivity assumption
• Always choose Coke, then Fanta etc.
II. Utility maximisation
• Consumer maximize their utility or
satisfaction by buying the combination of
goods and services for a given sum of money,
that maximizes their utility or satisfaction.
III. Perfect information
• This refers to equal and easy access to
information about alternative products that
are available on the market.
• This includes prices, product
specifications/quality
• Behavioral Economics: Limitations and
assumptions of the assumptions of rational
consumer choice.
• Behavioral economics:
• A branch of economics strongly influenced by
psychology, sociology and neuroscience based
on the idea that human behavior is more
complex than consumer rationality theory
assumes, that people aim to maximize their
own economic welfare when making a
decision.
• However, in reality, when making day-to-day
decisions, people rarely behave in a well-
informed and fully rational way.
• E.g. some people choose to drink to many
sugary drinks, eat too much junk food, take
too little exercise, smoke too much, do not
save enough money for their retirement etc.
• Behavioural economics is therefore the study
of actual decision making, with emphasis on
human behaviour being less rational than
traditional economic theory suggests.
• It acknowledges the power of social
conformity, because humans are social beings
whose behavior is clearly influenced by others
in society, including peer-pressure and the
desire to conform to social norms.
• Contrary to traditional economic theory,
behavioural economics does not assume that
individuals make choices in isolation or simply
to serve their own interests.
• Based on the above realities, the limitations
of rational consumer choice include the
following: