Consumer Behaviour

• Key assumption of economists: economic agents are rational and self-interested
• Homo economicus: consumers behave rationally, maximize satisfaction, and have perfect knowledge
• Consumers often make decisions based on imperfect information
• Debate on whether imperfect information challenges rational economic behavior
• Asymmetric information can lead to suboptimal decisions and market failure
• Utility is the satisfaction received from consuming a good or service
• Total utility is the overall satisfaction, while marginal utility is the additional satisfaction from consuming one more unit
• Law of diminishing marginal utility: as consumption increases, the additional utility decreases
• Price is a sensible way to measure utility in the real world
• Opportunity cost is the next best alternative foregone when making a decision

This module discusses the theories underlying consumer behavior and decision making. Economists assume that individuals are rational and self-interested, aiming to maximize their satisfaction. However, this assumption does not always hold true in real-life situations. Consumers often make decisions based on imperfect information, which challenges the notion of rational behavior. Asymmetric information can lead to suboptimal decisions and market failure. The concept of utility is used to measure the satisfaction derived from consuming goods or services, with total utility representing overall satisfaction and marginal utility representing the additional satisfaction gained from consuming one extra unit. The law of diminishing marginal utility states that as consumption increases, the additional utility derived from each unit decreases. This concept can be measured using money, as price is a sensible way to gauge utility. The marginal utility curve is equivalent to the demand curve, both exhibiting a downward slope due to diminishing marginal utility. Opportunity cost, the next best alternative foregone when making a decision, is crucial in decision making. It is important to consider the marginal benefits and costs when weighing options.