Economic models start from a simple picture of the buyer. Picture Lena choosing a new phone with €400 to spend.
The three assumptions about consumers
Consumer rationality
Lena can rank every phone, and her ranking is consistent: A beats B, B beats C, so A beats C.
Utility maximisation
Utility is satisfaction. She picks the phone that gives her the most for her €400.
Perfect information
She knows every phone on sale, its price and its quality.
The points to remember
- Rational consumer choice: consumers are assumed to choose what maximises their utility.
- Utility: the satisfaction a consumer gets from consuming a good.
- Perfect information: complete knowledge of every option, price and quality.
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Firms get the same treatment: a rational producer is assumed to maximise profit (more in 2.4.6). Together these assumptions build the demand and supply model.
Why economists keep the model
| Assumption | What it lets us predict |
|---|---|
| Consumers maximise utility | Buyers buy more when the price falls: demand slopes down. |
| Firms maximise profit | Firms sell more when the price rises: supply slopes up. |
| Everyone has perfect information | Buyers and sellers react to a price change at once. |
Useful is not the same as true: A model does not have to be true to be useful. It has to predict well on average, across many buyers.
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Real people do not always behave like Lena in the model. Behavioural economics studies where each assumption breaks.
Where the assumptions break
| The model assumes | Real life | The name for it |
|---|---|---|
| People weigh every option | No time to compare 40 phones: pick one that is good enough | Bounded rationality |
| People do what is best for them | Lena buys a phone on credit she knows she cannot afford | Bounded self-control |
| People care only about themselves | People tip, donate and share | Bounded selfishness |
| People know everything | The seller knows the battery is weak; Lena does not | Imperfect information |
| People judge prices calmly | "Was €600, now €400" feels like a bargain | Biases (anchoring, framing) |
Remember it as: The model assumes the perfect shopper. Real shoppers are busy, tempted, kind and not fully informed.
Paper 1 asked this in May 2023, as part (b) for 15 marks. No diagram is needed: the marks are for the theory, real examples on both sides and a judgement.
Using real-world examples, discuss the assumption that consumers always seek to maximise their utility.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
How the 15 marks are given
| Marks | What your answer needs |
|---|---|
| 13–15 | Theory fully explained, terms right all the way through, balanced evaluation, real examples fully developed to support the argument |
| 10–12 | Theory explained, terms mostly right, evaluation mostly balanced, real examples developed |
| 7–9 | Theory partly explained, some evaluation but one-sided, examples partly developed |
| 4–6 | Theory only described, evaluation superficial, examples only named |
| 1–3 | Theory stated but not relevant, no evaluation |