As we have previously mentioned, the view that the free market allocates resources efficiently based on allocating resources where Demand=Supply or the marginal benefit = marginal cost is based on the following assumptions.Â
Consumers act rationally -
Consumers have perfect Information -
Consumers aim to maximise their utility - Earlier we learn't that a rational decision maker aims to maximise their own utility for goods that they consume. For example, imagine if a consumer was presented with a choice between buying a sub sandwich, which gives the consumer 6 utils of satisfaction, or a burger for that gives 8 utils of satisfaction. If both cost $5, the the rational consumer will chose to consume a burger as this would give them the most utils for their $5.
Behavioural economists criticise consumer rationality and utility maximisation on the basis of the following:
A cognitive bias is a term that refers to systematic errors in thinking or evaluating. We all have biases that can affect our decision-making process. Most of the time, we do not even know we have a bias. Biases can form from the following: