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As we all know that economics law is true if the consumer behaves rationally. Hence the foundation of all economics law is rationality in consumer behavior. Rationality means behavior of consumer using proper reasoning process in any given situation.
Let's first understand the concept of Rationality:
Despite some misconceptions, consumer rationality is a property of the researcher rather than the consumer. Consumers become more rational as we are better able to predict their behavior or other important outcomes influenced by their behavior. Perfect rationality results when we achieve accurate predictions. Consequently, at least for many Marketing Science articles, consumers are becoming more rational as we find better ways to predict. However, some experimental consumer behavior articles find the opposite. The difference between experimental and statistical controls explains the divergence in conclusions. Experimental controls test rationality based on whether previously absent variables exhibit significant explanatory power holding known explanatory variables constant. Statistical controls test rationality based on the incremental explanatory power of previously absent variables after accounting for known explanatory variables. Moreover, experimental tests tend to isolate consumer behavior predictions while statistical tests check for sufficient accuracy to choose among different firm strategies. Both perspectives are correct but ask very different questions.
These preferences can be modeled and mapped through the use of indifference curves. In order to graphically portray consumer preferences, we need to define some terms. First, since we will be working in two dimensions (2-d graphs), we assume a two good world. These could be any two goods. One common treatment is to define one good, say food, and let the other good be a composite of all other goods. For expository simplicity (making things easier for me), let’s define the two goods as Good X and Good Y. The axes of the graph then measure amounts of Good X on the horizontal, and amounts of Good Y on the vertical. Each point in this Cartesian space then defines some combination of goods X and Y. We call these combinations commodity bundles.
Let's start our discussion about Irrationality of the consumer.
As we all know that economics law is true if the consumer behaves rationally. Hence the foundation of all economics law is rationality in consumer behavior. Rationality means behavior of consumer using proper reasoning process in any given situation.
Let's first understand the concept of Rationality:
Despite some misconceptions, consumer rationality is a property of the researcher rather than the consumer. Consumers become more rational as we are better able to predict their behavior or other important outcomes influenced by their behavior. Perfect rationality results when we achieve accurate predictions. Consequently, at least for many Marketing Science articles, consumers are becoming more rational as we find better ways to predict. However, some experimental consumer behavior articles find the opposite. The difference between experimental and statistical controls explains the divergence in conclusions. Experimental controls test rationality based on whether previously absent variables exhibit significant explanatory power holding known explanatory variables constant. Statistical controls test rationality based on the incremental explanatory power of previously absent variables after accounting for known explanatory variables. Moreover, experimental tests tend to isolate consumer behavior predictions while statistical tests check for sufficient accuracy to choose among different firm strategies. Both perspectives are correct but ask very different questions.
Consumer Preferences -
Consumer preferences are defined as the subjective (individual) tastes, as measured by utility, of various bundles of goods. They permit the consumer to rank these bundles of goods according to the levels of utility they give the consumer. Note that preferences are independent of income and prices. Ability to purchase goods does not determine a consumer’s likes or dislikes. One can have a preference for Porsches over Fords but only have the financial means to drive a Ford.These preferences can be modeled and mapped through the use of indifference curves. In order to graphically portray consumer preferences, we need to define some terms. First, since we will be working in two dimensions (2-d graphs), we assume a two good world. These could be any two goods. One common treatment is to define one good, say food, and let the other good be a composite of all other goods. For expository simplicity (making things easier for me), let’s define the two goods as Good X and Good Y. The axes of the graph then measure amounts of Good X on the horizontal, and amounts of Good Y on the vertical. Each point in this Cartesian space then defines some combination of goods X and Y. We call these combinations commodity bundles.
Irrationality -
The irrationality of the consumer is a situation when the consumer is not behaving in a way as one can behave in the normal situation regarding consumption of resources or for deriving utility from goods/services.
Let's take an example, A purchase goods when the price of goods reduce but after certain point A will stop buying additional quantity of goods due to fear of loss in future. Hence Law of demand which suggest that when price of goods reduces, demand of goods will increase. but same can not be true is consumer not behave rationally in given situation.
To find irrationality in consumer behavioral we will find its standard deviation of demand between two consumer - 1. Rational consumer & 2. Irrational consumer.
For given demand of rational consumer we will find what is the demand of rational consumer using below formula.
To find irrationality in consumer behavioral we will find its standard deviation of demand between two consumer - 1. Rational consumer & 2. Irrational consumer.
For given demand of rational consumer we will find what is the demand of rational consumer using below formula.
Using above formula we can be derived Demand if one can behave in a rational manner but by comparing actual demand of irrational person we can find out the irrationality.
As Price of goods reduce, rational consumer increase its demand as shown by way of expected demand. but demand of irrational consumer reduces as shown by the blue line.
Here we calculate irrationality by the following formula.
Amount of irrationality in above example is 74 Unit.
Ralationship with other disciplines like behavioral science, Micro Economics, Business management & Management theories.
The utility of this Concept:
Consumer rationality is mainly used in sales forecasting, Production planning, marketing & Communication.
Ralationship with other disciplines like behavioral science, Micro Economics, Business management & Management theories.
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