2.4.1 Rational consumer choice (HL only) Notes

Most economic models and theories are based on the idea that decision-makers maximise their own satisfaction:

1. Consumers maximise their utility (satisfaction from buying a good or service).
2. Producers maximise their profits.
3. Workers maximise wages.
4. Investors maximise returns.

However, as we will discover in this section, these assumptions may not always hold.

Assumptions behind the rational consumer choice

Consumer Rationality

Rational consumer choice assumes that consumers are rational. In economics, consumer rationality exists when consumers follow these three principles:

1. Completeness.
2. Transitivity.
3. Non-satiety.

Completeness

1. Consumers can always rank goods and services in order of preference.
2. They can state with certainty whether they prefer good $X$ to good $Y$, $Y$ to $X$, or if they are indifferent between the two.

Transitivity

1. Preferences remain consistent and do not cycle.
2. For example, if a consumer prefers good $X$ to good $Y$, and good $Z$ to good $X$, they will also prefer good $Z$ to good $Y$.

Non-satiety

1. More is always better.
2. Having more of a good or service is preferred because it increases utility or satisfaction.

Utility Maximisation

1. Consumers aim to maximise utility in each of their choices.
2. Given a budget constraint, they choose the goods or services that lead to them having the most utility.

Perfect Information

1. Assumes consumers have access to all relevant information about their options (e.g., prices, quality, alternatives).
2. Hence there is no uncertainty in their decision.

Behavioural economics: limitations of the assumptions of rational consumer choice

1. Behavioural economics highlights the psychological, emotional, and social factors that influence decision-making.
2. Challenges the idea that consumers always act rationally.

There are 5 main factors that behavioural economics considers to influence the rational consumer choice:

1. Biases.
2. Bounded rationality.