Essay 2 of the 2021 AQA Economics Paper 1 asked students to discuss the extent to which economic agents are entirely rational in their decision making. Here is a model answer to that question:
The traditional economic view of human behaviour would argue that individuals do act as rational decision makers to maximize their utility. This view is based on the theoretical construct of homo-economicus or ‘the economic man’, which theorizes that humans have a clear set of characteristics that determine their behaviour. It argues that humans are perfectly rational, weighing up all of the costs and benefits of their consumption decisions before making a purchase. They are totally self interested, never displaying any regard for others emotions or any altruism. They can also exhibit perfect self control, able to avoid temptation. It could be argued that consumers are acting with self control and in rational ways by switching from traditional cigarettes, which are highly damaging to health, to e-cigarettes which contain fewer harmful chemicals such as tar. However, they still contain the highly addictive nicotine and therefore consuming this substance in any form could be seen as evidence of a lack of rationality and self control, which would contradict the traditional view.
Another reason to suggest that individuals act rationally is based on marginal utility theory. Utility is a term economists use to describe the satisfaction that individuals gain from consuming a product. Marginal utility is the additional satisfaction that will be gained from consuming one more of a product. The law of diminishing marginal utility states that marginal utility reduces with each additional product that we consume. This means that the marginal utility curve will be downward sloping and equal to the demand curve. A rational consumer would consume e-cigarettes only up to the point where price is equal to marginal utility of consumption. Beyond this point, the additional satisfaction of consuming an e-cigarette would be lower than the purchase price (the cost to the consumer). It could therefore be argued that it would be a rational, utility maximizing decision for individuals to consume e-cigarettes as long as the price does not exceed their marginal utility. However, when making this decision there may be an information failure which individuals are failing to consider. Normal cigarettes, and potentially also e-cigarettes (due to the nicotine contained) would be seen as a demerit good, meaning it causes unanticipated harms to the consumer. Consumers may make their consumption decision based on more immediate benefits and utility, ignoring these long term harms. This may mean they consume more of these products that would be considered rational.
An argument that individuals do not act rationally to maximize their utility is based on the importance of behavioural biases. The field of behavioural economics would suggest that consumers rationality and self control is bounded. This does not mean that individuals are totally irrational or have no self control, but rather these characteristics are limited. They might take decisions using heuristics or ‘rules of thumb’ rather than weighing up the marginal utility that a purchase decision will provide them. They might therefore see that most people see e-cigarettes as a bit less harmful and so decide to buy them, without fully researching all of the potential long term harms. Another behavioural bias which could be relevant is the existence of social norms. This means that individuals take actions based on what society deems acceptable rather than taking their own utility maximizing decisions. If cigarettes or e-cigarettes are seen as fashionable and socially acceptable, individuals may be swayed to purchase and consume them even if it is not an optimal decision for themselves.
On balance, I do not think that individuals will always act perfectly rationally to maximize their own utility. Life is too complicated and there are too many potential biases to realistically think that an individual can make such complicated calculations for every decision in their day to day lives. However, this does raise the question of whether using shortcuts or heuristics could actually be deemed even more rational. If we spent all of our time researching the full costs and benefits of each purchase we made, we would struggle to get through the day – could this really be deemed to be rational? It could also be argued that, while individuals clearly don’t act perfectly rational for every decision, we need to remember that economics is a social science, which can survive more exceptions. Individuals as rational, utility maximizing decision makers may be the best estimation of human behaviour that we have, which is useful as long as we are aware of the exceptions.
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