Imagine you go shopping for new shoes. How do you decide what to buy? Would you make the decision solely based on the price? Or perhaps based on the style or quality of the shoes? The decision wouldn’t be the same if you were looking for shoes for a special occasion or for everyday trainers, right?
A shoe shop, Pixabay.
Do you believe that as a consumer you are always making rational choices? The answer is simple: it may be impossible for us to always act rationally. This is because as consumers we are affected by our emotions and our own judgments which prevent us from always selecting the best available alternative. Let’s learn more about consumer rationality.
What is a rational consumer?
A rational consumer is an economic concept that presupposes that when making a choice, consumers will always focus primarily on the maximisation of their private benefits. In decision making, rational consumers select the option that will bring the most utility and satisfaction to them.
The concept of rational consumer describes the individual acting out of self-interest with the main aim of maximising their private benefits through consumption.
The concept of rational consumer assumes that consumers behave in a way that maximises their utility, welfare, or satisfaction through the consumption of goods or services. The rational consumers' choices also involve consideration of a product's prices and other demand factors.
Imagine that a person has to choose between buying a more expensive car A and a cheaper car B. In case the cars are identical, the rational consumers would pick car B since it will give the most value for its price.
Nevertheless, if the cars have different energy consumption levels, this will factor into the consumer’s decision. In that case, rational consumers will work out which car will be more affordable in the long run.
Additionally, rational consumers will evaluate all important factors and assess other demand factors before making a choice.
Finally, the rational consumers will make a choice that leads to the maximisation of their private benefits.
However, consumers in the real world may not always act rationally. Their choices are usually made based on their own judgements and emotions in regards to what seems the best option at a particular time.
A rational consumer’s behaviour
As we already mentioned the behaviour of a rational consumer would be to act in terms of maximising their private benefits that include satisfaction, welfare, and utility. We can measure these using utility theory, in regards to how much utility the good provides to consumers at that time.
To learn more about consumer utility and its measurement check our explanation on Utility Theory.
A rational consumer behaviour follows the individual’s demand curve like Figure 1 shows. This means that the changes in prices of goods should impact the changes in the quantity demanded. For instance, once the price for certain goods decreases, the demand should increase, and vice versa.
To learn more about the law of demand check our explanation on Demand for goods and services.
Other factors that may affect rational consumers’ behaviour are the conditions of demand. These include factors such as income, individual consumers’ preferences, and taste. With an increase in income, for example, consumers’ purchasing power increases. This results in an increase in demand for normal goods, but decreased demand for inferior goods.
Figure 1. Individual’s demand curve, StudySmarter Originals
Inferior goods are goods that are of poorer quality and are more affordable substitutes for normal goods. Therefore, once income rises, the consumption of these goods decreases, and vice versa. Inferior goods include products such as canned foods, instant coffee, and supermarkets’ own branded value products.
To learn more about how the quantity demanded of normal and inferior goods responds to income changes check our explanation on Income elasticity of demand.
Assumptions of consumer rationality
The main assumption of rational behaviour is that when the price of a good falls, the demand for that particular good is likely to increase, whereas if the price of a good increases, the demand for the good decreases. Additionally, we assume that consumers will always attempt to maximise their utility by choosing the best alternative using a limited budget.
Let’s review some additional assumptions of consumer rationality:
Consumers choices are independent. Consumers base their buying decisions on their preferences and taste, and not on the opinions of others or on commercial advertisements.
Consumers have fixed preferences. The consumers’ preferences will remain constant over time. Consumers will not choose alternatives over their most preferred choices.
Consumers can gather all the information and review all available alternatives. Consumers have unlimited time and resources to review all the alternatives available.
Consumers always make optimal choices regarding their preferences. Once consumers have reviewed all their options, they can pick the best choice based on their preferences.
It’s important that you remember that these are all theoretical assumptions. This means that consumer behaviour might be different in real life.
Constrains preventing consumers’ rationality
Consumers can’t always act rationally because there are individual and marketplace constraints that prevent them from maximising their utility and selecting the best alternative.
Constrains that prevent utility maximisation
These are the constraints that stop consumers from maximising their utility. In this case, even if consumers have rational behaviour, they face constraints to choosing the best possible alternative due to these factors:
Limited income. Although consumers may be wealthy, they can’t afford all the goods available on the market that will maximise their utility. Therefore, they encounter an opportunity cost: if they spend their income on one good, they can’t spend it on another.
A given set of prices. Consumers are powerless to influence market prices. Therefore, they have to follow the prices set by the market. Consumers are price takers, not price makers, which means marketplace prices can influence their choices.
Budget constraints. A limited income and prices imposed by the marketplace, influence consumers’ budgets. Consumers, thus, don’t have the freedom to buy all the goods that can maximise their utility.
Limited time available. A time limit restricts consumers’ ability to consume all the goods on the market that will maximise their utility. This happens regardless of whether these goods were free or consumers had unlimited income.
Rational consumer behavioural constrains
Their behavioural constraints prevent consumers from acting rationally. For instance, behavioural factors such as the inability to fully evaluate all alternatives, social influences, and lacking self-control are some of many behavioural factors that prevent consumers from acting rationally.
The key behavioural constraints are:
Limited calculation capabilities. Consumers are unable to collect and review all the information regarding possible alternatives to choose the best one.
Influences from social networks. Usually, people close to an individual can influence that person’s choices, which is what prevents consumers from sticking to their individual preferences and tastes.
Emotions over rationality. There are times when consumers can make consumption choices based on their emotions rather than logical thinking. For instance, instead of looking at the technical aspects of a product, consumers may select a product because a celebrity they like endorsed it.
Making sacrifices. Some people may not always act out of self-interest and make a decision that benefits them the most. Instead, consumers may want to make sacrifices for other people. For instance, donating money to charity.
Seeking instant rewards. Even though one alternative will give more benefit in the future, sometimes consumers seek instant rewards. For example, consumers may want to indulge in a high-calorie snack instead of waiting for a healthy lunch.
Default choices. Sometimes, consumers sometimes don’t want to invest the time and energy into making rational decisions. Due to this, consumers may make choices that are easily accessible or stick with the same choices requiring the least amount of effort. For instance, consumers may choose McDonald’s or KFC when they travel to a new country because they don’t want to make the effort to try something new.
To learn more about the limitations to rational consumer behaviour take a look at our article on Aspects of Behavioural Economic Theory.
Consumer and Rationality - Key takeaways
- A rational consumer is an economic concept that presupposes that when making a choice, consumers will always focus primarily on the maximisation of their private benefits.
- Rational consumer behaviour follows the individual’s demand curve, which means that the changes in prices of goods should impact the changes in the quantity demanded.
- Other factors that may affect rational consumers’ behaviour are known as conditions of demand. They include factors such as income, preferences, and individual consumers' tastes.
- The assumption of rational behaviour is that when the price of a good falls, the demand for that particular good is likely to increase, whereas if the price of a good increases the demand for the good decreases simultaneously.
- Other consumer rationality assumptions include: consumers choices are independent, consumers have fixed preferences, consumers can gather all the information and review all available alternatives, and consumers always make optimal choices regarding their preferences.
- The key constraints that prevent consumers from maximising their utility are limited income, given sets of prices, budget constraints, and limited time.
- The key constraints that prevent consumers from behaving rationally are limited calculation capabilities, influences from social networks, emotions over rationality, making sacrifices, seeking instant rewards, and efault choices.
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