1.2 Individual economic
decision making
1.2.1 Consumer behaviour
Traditional economic assume consumers try to maximise utility or satisfaction.
They assume economic agents are rational:
Choose independently of one another
Have fixed and stable preferences
Have access to complete and accurate information on all the available
alternatives
Respond to incentives to make optimal choices
Total utility is the total satisfaction from a given level of consumption.
Marginal utility is the change in satisfaction from consuming an extra unit.
Marginal benefit – is the change in total private benefit from one extra unit
Marginal cost – is the change in total private cost from one extra unit
Reasons for irrational behaviour
herding behaviour
impulsive buying
consumer inertia - cba to switch, e.g. broadband providers
bounded rationality (imperfect information)
enough information not provided
rushed into making a decision
Behavioural economics disputes rationality and utility maximisation and attempts to
explain why people make irrational decisions due to social and psychological factors
influencing decision-making.
1.2 Individual economic decision making 1
, 1.2.2 Imperfect information
Information failure
Information failure occurs when people have inaccurate, incomplete, uncertain or
misunderstood data and so make potentially ‘wrong’ or sub-optimal choices.
Causes of information failure
Misunderstanding the true costs/benefits: e.g. the side effects of using tanning
salons or painkillers
Uncertainty about costs and benefits e.g. should younger workers be buying into
pension schemes when we can only guess at conditions in 40 years’ time?
Complex information when buying specialist products
Inaccurate or misleading information persuasive advertising may ‘oversell’ the
benefits of a product leading to more consumption than is optimal. Spam mail
can be a cause of misinformation for consumers.
Addiction e.g. drug addicts may be unable to stop consumption of harmful
substances
Lack of awareness–a good example here is that of tuition fees in Britain–many
parents and students find the system of university finance difficult to understand
Habitual purchase – buying goods simply out of habit e.g. reordering the same
items in an online grocery shop because consumers are presented with their
1.2 Individual economic decision making 2
decision making
1.2.1 Consumer behaviour
Traditional economic assume consumers try to maximise utility or satisfaction.
They assume economic agents are rational:
Choose independently of one another
Have fixed and stable preferences
Have access to complete and accurate information on all the available
alternatives
Respond to incentives to make optimal choices
Total utility is the total satisfaction from a given level of consumption.
Marginal utility is the change in satisfaction from consuming an extra unit.
Marginal benefit – is the change in total private benefit from one extra unit
Marginal cost – is the change in total private cost from one extra unit
Reasons for irrational behaviour
herding behaviour
impulsive buying
consumer inertia - cba to switch, e.g. broadband providers
bounded rationality (imperfect information)
enough information not provided
rushed into making a decision
Behavioural economics disputes rationality and utility maximisation and attempts to
explain why people make irrational decisions due to social and psychological factors
influencing decision-making.
1.2 Individual economic decision making 1
, 1.2.2 Imperfect information
Information failure
Information failure occurs when people have inaccurate, incomplete, uncertain or
misunderstood data and so make potentially ‘wrong’ or sub-optimal choices.
Causes of information failure
Misunderstanding the true costs/benefits: e.g. the side effects of using tanning
salons or painkillers
Uncertainty about costs and benefits e.g. should younger workers be buying into
pension schemes when we can only guess at conditions in 40 years’ time?
Complex information when buying specialist products
Inaccurate or misleading information persuasive advertising may ‘oversell’ the
benefits of a product leading to more consumption than is optimal. Spam mail
can be a cause of misinformation for consumers.
Addiction e.g. drug addicts may be unable to stop consumption of harmful
substances
Lack of awareness–a good example here is that of tuition fees in Britain–many
parents and students find the system of university finance difficult to understand
Habitual purchase – buying goods simply out of habit e.g. reordering the same
items in an online grocery shop because consumers are presented with their
1.2 Individual economic decision making 2
