Economics, 3rd Edition

THE STANDARD ECONOMIC MODEL

When you walk into a shop, you are confronted with thousands of goods that you might buy. Of course, 

because your financial resources are limited, you cannot buy everything that you want. The assumption 

is, therefore, that you consider the prices of the various goods being offered for sale and buy a bundle of 

goods that, given your resources, best suits your needs and desires. In economic terminology, you are 

seeking to maximize your utility subject to the constraint of a limited income.

This model is called the classical theory of consumer behaviour or the standard economic model (SEM) 

and is fundamentally based on an assumption that humans behave rationally when making consumption 

choices.

The standard economic model provides a theory of consumer choice which provides a more complete 

understanding of demand. One of the Ten Principles of Economics discussed in Chapter 1 is that people 

face trade-offs. The theory of consumer choice examines the trade-offs that people face in their role as 

consumers. When a consumer buys more of one good, he can afford less of other goods. When he spends 

more time enjoying leisure and less time working, he has lower income and can afford less consumption. 

When he spends more of his income in the present and saves less of it, he must accept a lower level of 

consumption in the future. The theory of consumer choice examines how consumers facing these trade-

offs make decisions and how they respond to changes in their environment.

When making these trade-offs, there are a number of assumptions that are made about consumers. 

These include:

 

●

Buyers (or economic agents as they are sometimes referred to) are rational

 

●

More is preferred to less

 

●

Buyers seek to maximize their utility

 

●

Consumers act in self-interest and do not consider the utility of others.

Value

A key concept in consumer behaviour and across many other areas of economics is value. Value can be 

regarded as a threshold concept – an understanding of the concept of value helps to provide a transformed