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| iv. Consumers as satisfaction maximisers |
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Are consumers rational satisfaction maximisers?
Market theory assumes that consumers know what is best for themselves - that is they can make choices which will maximise their total satisfaction. If this assumption is wrong then markets will not automatically produce efficient results.
Economists call the satisfaction that consumers get from consuming a good or service utility. So the extra satisfaction from consuming a bit more is called marginal utility while the total satisfaction gained from consuming the whole amount is referred to as total utility. The satisfaction gained simply depends on the quantity and mix of goods and services chosen. The theory assumes that consumers get more satisfaction from more goods and services but that the increase in satisfaction from consuming another unit - the marginal utility - diminishes as consumption rises.
Maximising utility
How do consumers go about choosing the mix of goods and services which give them the maximum total utility? They start by thinking about what they like (their tastes/preferences) and then look at how much money they have to spend (their income) and the prices of the different goods and services. They then choose the combination which gives them the highest utility for the money spent. We introduced this idea earlier when we talked about a consumer buying CDs. We argued that
"you are able to relate your benefit to the price of the CD. If we look at the market for CDs, people will go on buying CDs until the extra satisfaction from the last CD is exactly equivalent to the price of the CD. We have reached the situation where we as a society are consuming the 'right' quantity of CDs in the sense that we are gaining the maximum possible satisfaction from CDs given their price."
"By choosing a particular bundle of goods, people demonstrate that they prefer it to all others; consequently, it is best for them. And, if all people are in their best position, then society - which is simply the aggregation of all people - is also in its best position. Therefore, allowing people to choose in the marketplace results in the best of all possible economic worlds" - Thomas Rice.
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| Another view of consumers
However, Thomas Rice in The Economics of Health Reconsidered suggests a range of reasons why this view of consumer behaviour could be mistaken. Here are three of them:
- The idea that consumer utility just depends on the bundle of goods and services consumed. If this were true then people in rich developed economies ought to be appreciably happier than people in poor developing economies. However, research by Easterlin in 1974 showed that "average levels of happiness are fairly constant across countries; people in poor countries and wealthy countries claim to be equally happy" - Rice. Easterlin's research suggested that utility depended on your relative consumption - so rich people were happier than poor people in all societies. This means that if you consume more that could reduce my utility because I am now relatively worse off.
- Traditional theory ignores the issue of how tastes are determined. Evidence from social psychology suggests that tastes are determined by people's past and present environments. So for instance, if you are in a peer group which smokes then you are likely to develop a 'taste' for smoking which will remain even after you have left the peer group. If this is true then it is not clear that satisfying tastes will actually make people better off. In fact "If one believes that tastes are determined in such a way, then it becomes clear that a society might be better off pursuing some goods and services that are not demanded most strongly by the public. This is because people might not know what alternatives are available that will make them better off".
- Are consumers rational? What do economists mean by the concept of rationality? In a narrow sense they mean that people will behave consistently - so if they prefer A to B and B to C then they will prefer A to C. More widely, they mean that people will behave in a reasonable manner. If consumers are not rational in this sense, then they will not necessarily make decisions which maximise their welfare.
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Social psychology suggests that people are often not rational in this sense - instead they exhibit what is called cognitive dissonance. In other words, they simultaneously hold two ideas which are psychologically inconsistent and use various forms of self-justification and rationalization to overcome the tension. Take the issue of saving for old age. It is rational to do this but nevertheless often people do not do it. Why not? Well the act of saving forces you to face up to the reality of ageing. If you are scared of getting old then you are likely to refuse to contemplate this and so choose not to save. Cognitive dissonance suggests that people will often not make decisions which maximise their utility.
Rice argues that the issues raised above are particularly important in health care markets. Consumers are unlikely to be in a position to appreciate the full range of possibilities available to them and so need expert help to guide them. This is particularly true as many situations affecting health are likely to produce cognitive dissonance. If utility is relative then this suggests that society would be better off with some form of universal provision rather than one based on individual health care purchases.
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| Now look at these (check the status bar for information)
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How do economists define the concept of rationality? |
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