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Economics explained


Behavioral economics

Are consumers rational?

Are consumers rational?

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Perfect information

The law of diminishing marginal utility assumes that consumers act and behave in a rational way in their purchasing decisions and consumers possess perfect information. For example, about the goods that are available to buy, their prices and quality, and about the utility which will be derived from their consumption.

Imperfect information

When attempting to maximise total utility, more often than not consumers possess imperfect information. As a result, they make 'wrong' decisions. For example, consumers may choose to under-consume a merit good such as education and over-consume a demerit good such as tobacco because they possess imperfect information about the long-term consequences of their choices.

A few other examples will show why consumers often act in an irrational way:

In the case of special offers such as ‘buy one get one free’.

Consumers may have no intention of buying the product until they enter the shop. Seeing the offer produces an impulsive cognitive response to buy.

Where payment can be deferred.

This allows consumers to purchase beyond their ability to pay outright at the time of sale – they may use a credit card to obtain what they want.

Brand image

Where a consumer is emotionally attached to a brand or where there is a prejudice against a brand, so influencing consumption

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