Rational Consumer Choice

Economics

What is Rational Consumer Choice?

Rational choice is a school of thought based on the assumption that consumer choices are made in sync with the personal preferences of human beings. It helps economists understand the behavior of society via personal actions as explained in rationality. In rational consumer choice school, the choices are consistent because they are made depending on personal preferences.

In rational choice theory, the school that is based on rational consumption, agents are illustrated by their non-changing preferences over all conceivable global results. Agents are termed rational if their rationality is complete and ordered. By completeness, it is assumed that preferences are complete when they reflect a relationship of superiority, inferiority, or indifference among all the pairs of choices. By ordered it is meant that the preferences are not subject to any cyclical inconsistencies.

Moreover, for uncertain and changeable probabilities of preferences, the agents in rational theory show consistencies in their preferences that are similar to an astute gambler.

Example of Rational Consumer Choice

Several examples of rational consumer choice can be found in day-to-day lives. As people make decisions spending on their preferences, individual consumer choices differ from person to person. This is reflected in the decisions made by individuals in various instances of life.

Example

Let us assume that there are two people who want to buy T-shirts. We can divide the preferences of these two people based on the price of the T-shirts. While one consumer may go for the cheaper price because that will fit his budget, another may go for a high-end, pricey one because it is a quality product and will last longer than the cheaper product.

In this example, both persons are making rational decisions. However, their nationalities are different. While one consumer is making a choice depending on the prices, the other one is looking for the quality and durability of the product in return for the higher price of the product.

Assumptions of Consumer Rationality

The school of thought that represents consumer rationality states that there are three primary assumptions of preferences. They are as stated below:

Completeness

While considering two products, the theory of completeness suggests that preferences are complete if the consumer can say one of two products is better, inferior, or equally good to the other.

For example, out of two products A and B, the rationality of an individual would be complete if he/she could say if A is preferred to B, B is preferred to A, or A and B are equally preferred.

Transitivity

In order for preferences to be transitive, they must be internally consistent.

For example, if A is preferred to B, and B is preferred to C, then A should automatically be preferred to C.

More is better

More is better principle suggests that if a bundle of goods A contains more goods of one kind and no less than goods of other kinds of bundle B, then A would be preferred to B.

Usually, completeness and transitivity are profoundly utilized in the school of consumer behavior. However, more is better is also applicable if there is free disposal of a product. If more is not worse in a certain situation, then more is good is preferred to less of the good.

In some instances, the assumptions of preferences do not apply.

For example, if a person does not know Hindi enters a restaurant, the menu of which is written completely in Hindi, he/she cannot follow these assumptions of rational consumer choice.

Constrains Preventing Consumers’ Rationality

Although it is believed that consumers always act depending on rationality, there are individual and market constraints that prevent them to act rationally. These preventions affect the consumer decisions that tend to maximize the utility and select the best alternatives.

These constraints prevent consumers from accessing the best of their utilities. In such cases, just having a rational consumer behavior is not sufficient to express consumer rationality.

Following constraints prevent rational utility maximization:

Limited Income

If income is limited, the consumer is tied to a tight budget constraint. So, even if there is a rationale to buy a product, if the price of the product is higher than the budget, consumer choices cannot be made.

Given set of market prices

As the consumers are price takers and not price makers, they have to follow the rationale of the market most of the time. They cannot follow their own rationale while buying a product due to market price factors.

Budget constraints

A limited budget can stop a consumer from making rational choices. If the price of a product goes above the budget, even a rational consumer cannot buy a product of choice.

Limited availability of time

Limited availability of time stops a consumer from making rational consumer choices, even when limited income and market prices are in favor of the consumer.

Behavioral Constraints

Limited calculation capabilities

A rational consumer cannot check all the possible alternatives of a product due to the many varieties. In such a case, the consumer cannot make a rational decision.

Social Network Influence

Social media influences buyers to change their decisions. Influencers’ styles and preferences may let the consumer shift their rational consumer choice from one product to another.

Emotional Impact

In certain cases, people make consumer choices depending on emotions rather than rationality.

Charitable Causes

Charitable causes may also let consumers shape a consumer choice. In some instances, for example, people make donations for a better cause.

Seeking Instant Pleasure

Many times, consumers make a choice because the product provides instant pleasure instead of long-term benefits. For example, people may buy high-calorie snacks because it gives instant pleasure rather than health benefits.

Default Choices

Sometimes, preferences may have default versions because the consumer doesn’t want to spend time making choices. For example, a person visiting a new country may go to KFC because he/she does not have the time to check alternatives.

Conclusion

Rational consumer choice is a very important topic in microeconomics. On one hand, it offers a scientific way to collect data on individual preferences, and on the other, it offers an insight into the collective decision-making process of societies. As the subject of rational decision-making is useful for businesses, there is a widespread use of the topic in business and economics.

Therefore, having knowledge of rational consumer choice is beneficial for both companies and individuals on a microeconomic scale.

FAQs

Qns 1. Do consumers make rational choices?

Ans. Consumers mostly make rational choices. However, sometimes they cannot make a rational decision because many factors stop them from making a rational decision.

Qns 2. What are some areas of study where rational consumer choice can be used?

Ans. Although rational consumer choice is a part of economics, it can be applied in modeling human behavior, political sciences, psychology, and philosophy.

Qns 3. What is the best advantage of rational decision-making?

Ans. The most notable advantage of rational decision-making is that it offers scientifically obtained data to reach an informed decision. This indirectly reduces the chances of errors and assumptions in decision-making.

raja
Updated on 13-Oct-2022 11:19:47

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