Explain how rules of thumb and irrationality can affect consumers’ demand for goods and services

AQA A-Level Economics Paper 1 June 2021

Explain how rules of thumb and irrationality can affect consumers’ demand for goods and services. (June 2019)

Firstly, consumers' demand can be affected by bounded rationality despite the assumption that all agents are rational. This happens due to a lack of information, a lack of time, and computational weakness. Despite the rational choices, for example when selecting a lunchtime meal deal, being the healthiest choices, consumers may still make poor choices. The first reason for this is that they may not have access to all the information about various ingredients, including the long-term impact on their health. For example, many drinks contain sweeteners which are known to be better than sugar, but there is still limited research about many of them. Secondly, when selecting a meal deal during the rush of a lunch break, consumers do not have the time to make a fully informed decision. Thirdly, even if they had the time and information presented to them, humans are shown to be indecisive or sometimes incapable of making a completely logical decision based purely on the numbers and the facts.

Secondly, consumers' demand for goods and services can also be affected by rules of thumb. Because economic agents show bounded rationality, they instead rely on rules of thumb and various biases day to day. Rules of thumb are mental shortcuts used to make quick, satisficing decisions that save time and don't require as much information. Anchoring is when consumers rely too heavily on a single piece of information. For example, consumers may rely on the first thing they read on the packaging of a food item. For example, a energy drink saying sugar free may seem healthy at first glance, but consumers are then likely to ignore the other ingredients and the impact on their health. Secondly, consumers may make irrational choices due to availabilty bias, which is when an agent makes judgements about future events based on their personal memories and experiences. For example, a consumer who has memories of suffering food poisoning due to a certain sandwich is less likely to try it again, even though that event was independent to the current choice in front of them.

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