Cambridge International as and a level Economics Ebook

Are consumers rational?
Th
e law of diminishing marginal utility assumes that 
consumers act and behave in a rational way in their 
purchasing decisions. Th
is is a big assumption to make. 
Empirical evidence consistently shows that there are other 
factors apart from just utility that determine what we 
purchase. To understand the behavioural factors involved 
requires ‘getting inside people’s heads’ to determine and 
then model such psychological infl uences.
A few examples will show why consumers oft en act in 
an irrational way.
■
In the case of special off ers such as ‘buy one get one free’. 
Consumers may have no intention of buying the product 
until they enter the shop. Seeing the off er produces an 
impulsive cognitive response to buy.
■
Where payment can be deferred. This allows consumers to 
purchase beyond their ability to pay outright at the time of 
sale – they may use a credit card to obtain what they want.
■
Where a consumer is emotionally attached to a brand or 
where there is a prejudice against a brand, so influencing 
consumption.
Th
is type of behaviour cannot be represented in a rational 
economic model. Interestingly, if consumers were rational, 
fi rms would have little need for marketing. Advertising that 
is designed to infl uence consumer choice would appear to 
be irrelevant. Behavioural economic models explore why 
consumers make irrational decisions, against what might 
have been predicted by conventional economic theory. 
It is therefore useful to bear these points in mind when 
evaluating the eff ectiveness of conventional economic 
models like that of utility.
Budget lines
As shown in 
Chapter 2
, consumers are constrained in 
what they are able to buy due to their limited income and 
the prices of goods they wish to buy. Th
ese two important 
underpinning principles of consumer behaviour are brought 
together in the idea of a 
budget line
. Th
is shows numerically 
all the possible combinations of two products that a consumer 
can purchase with a given income and fi xed prices.