Alternative views of consumer behaviour

What economists mean by “rational”

Consumers are assumed to make choices that maximise utility (satisfaction). Another way of describing rationality is consistent preferences: if someone prefers A to B, and B to C, they should prefer A to C.

In reality, consumer decisions often don’t match this neat model. For Edexcel, you need three explanations for why consumers may not behave rationally.

Influence of other people’s behaviour

Why it can cause “irrational” demand

Consumers can be swayed by social norms, peer pressure, or what they see others doing. This can lead to herding behaviour, where people copy the crowd rather than weighing up net benefits carefully.

How it affects markets

If a product becomes trendy, demand may rise above what we would expect if consumers were only responding to price and preferences. This can push up both equilibrium price and equilibrium quantity.

Exam-friendly examples

• Buying clothing brands because friends or influencers wear them

• Choosing a busier restaurant because it looks popular (However in many mark schemes a classic evaluation point could be “A busy restaurant may signal higher quality thus maximise utility”)

• Buying shares because “everyone else is”, without understanding the firm

Habits

Why habits can reduce rational decision-making

Consumers make lots of decisions quickly, so they often rely on habit as a shortcut. This can become irrational when circumstances change (prices rise, quality falls, or substitutes improve) but the consumer keeps buying the same option anyway.For example, many shoppers automatically filter prices from low to high when shopping online.

While this feels efficient, cheaper options are often lower quality and may need replacing sooner, leading to higher long-run costs. This shows how habits can lead to irrational decisions.

A related idea is consumer inertia, where people stick with the default choice because it is convenient, not because it is best (This concept appeared for 10 marks P1 June 2019 Section B).

Market impact

Habit can raise demand above the rational level and make demand more price inelastic. This is because consumers do not adjust much when price changes.

Examples

• Rebuying the same supermarket brands each week without comparing alternatives

• Addictive goods like cigarettes or alcohol, where the habit is hard to break

• Forgetting to cancel subscriptions you no longer use. For example in the UK, it is estimated that £688 million is spent annually on unused subscriptions.
  
  

Consumer weakness at computation

What it means

Consumers may struggle to process information, compare options, or do calculations accurately, especially when there is lots of choice. Firms can also design pricing and presentation in ways that make comparisons harder.

Typical ways it shows up

• Framing prices: monthly prices look smaller than annual prices, so demand can rise for subscription services

• Too much choice: consumers feel overwhelmed and may choose poorly or stick with a default

• Bulk-buying and waste: deals encourage buying more than needed, leading to food waste . For example British households throw away the equivalent of 8 meals per week on average.

• Shelf placement: eye-level products are easier to notice and compare, which can steer choices

• Opportunity cost errors: people may react differently to saving £10 on a cheap item than saving £10 on an expensive item