1.2.10 Alternative Views of Consumer Behaviour (Edexcel)

This study note for Edexcel covers Alternative Views of Consumer Behaviour

A) Reasons Why Consumers May Not Behave Rationally

1. Influence of Other People's Behavior

• Consumers are often influenced by the actions and choices of others, which can lead to deviations from rational behavior.
• Social norms, peer pressure, and conformity play a significant role in consumer decision-making.

Example: In fashion trends, consumers may purchase certain clothing items simply because they are popular or endorsed by celebrities, even if those choices do not align with their individual preferences or rational utility maximization.

2. Importance of Habitual Behavior

• Consumers often rely on habits and routines in their decision-making processes.
• Habitual behavior can lead to suboptimal choices if consumers do not regularly reevaluate their decisions.

Example: Many people have a habit of buying the same brand of toothpaste they have used for years without considering whether there are better or more cost-effective alternatives on the market.

3. Consumer Weakness at Computation

• Some consumers may struggle with complex calculations or may not have access to the information needed to make perfectly rational decisions.
• Limited cognitive abilities or information constraints can lead to suboptimal choices.

Example: When comparing the cost per unit of different-sized products, such as price per ounce of shampoo, consumers may find it challenging to calculate and compare value accurately, leading to potentially inefficient choices.

Numerical Example (Influence of Other People's Behavior):

• Suppose a consumer is considering purchasing a new smartphone. The consumer's utility-maximizing choice would involve analyzing factors like price, features, and brand reputation to maximize satisfaction.
• However, if the consumer's friends all own iPhones and strongly recommend them, the consumer might choose to buy an iPhone, even if it is more expensive and other options offer similar features. This decision may not align with rational utility maximization but is influenced by peer behavior.

Numerical Example (Consumer Weakness at Computation):

• Imagine a consumer who wants to buy a pack of diapers. There are two options available: Brand A offers 40 diapers for $10, while Brand B offers 60 diapers for $15.
• To determine the better deal, the consumer needs to calculate the price per diaper. Brand A costs $0.25 per diaper, while Brand B costs $0.25 per diaper as well. However, consumers who do not perform this calculation may make decisions based solely on the total price, potentially choosing the more expensive option.

Understanding the reasons why consumers may not behave rationally is crucial for economists and policymakers. It highlights the importance of behavioral economics, which studies how psychological and social factors influence economic decisions. Recognizing these deviations from strict rationality can help design policies and interventions to improve consumer welfare.