1.2.10 - Alternative views of Consumer Behaviour

Question 1

What do neo - classical economics argue?

Answer 1

. Consumers are rational. They aim to maximise their own utility or economic welfare

. They do this by buying a bundle of goods with their limited income

Question 2

Reasons why consumers may not behave rationally and behave irrationally.

Answer 2

. Consumer weakness at computation

. The influence of habitual behavior

. Consideration of the influence of other people’s behaviour

• Imperfect information and asymmetric information may also cause consumers to act irrationally
• ALL three reasons, may end up benefiting producers and firms by increasing profit

Question 3

Define Irrational

Answer 3

. Refers to decisions, which don’t maximise utility and can cause a loss of economic welfare

Question 4

Explain ‘Influence of other people’s behaviour’

Answer 4

. Individuals may act irrationally as they are affected by social norms or herd behaviour in order to ‘fit into society’

. For example, TVs are a social norm. Individuals may demand TVs as the majority of other households have it.

. Herd behaviour is when an individual copies the actions of a large group. For example, the stock market. When prices are low, investors invest in stocks, causing other people to copy and also invest in stock, resulting in market bubbles

Question 5

Explain ‘ Weakness at Computation’

Answer 5

. Many consumers may not be able to make comparisons between prices, so they may buy more expensive goods than needed

. For example, many consumers buy multipack goods, because they assume they are cheaper, but this is not always the case. The individual good may be actually cheaper so firms benefit from this.

. Consumers are also poor at self - control and so do things they know they shouldn’t

. Consumers make decisions, without looking at the long run effects, and so make irrational decisions. For example, instead of saving up for pension, they spend on what they ‘want’.

Question 6

Explain ‘ Influence of Habitual behaviour’

Answer 6

. The majority of people have habits which cause irrational behaviour and decisions.

. Habits reduce the amount of time it takes to do something (e.g. choosing meal at restaurant)

. Habits also create a barrier to decision making, as it prevents consumers from considering an alternative

. Habitual Behaviour also includes addictions such (e.g. drugs, alcohol), even though consumers know they are de - merit goods and cause harm.

. Producers may be able to benefit from habitual behaviour. For example, consumers buy products at eye level so so supermarkets keep their most profitable products at eye level