Using real world examples, discuss the view that consumers always seek to maximise their utility [15]

The assumption that consumers always seek to maximise their utility is fundamental to economic theory, particularly within the frameworks of microeconomics and consumer behaviour. Utility maximisation refers to the idea that individuals choose to allocate their resources (e.g., time, money) in a way that maximises their satisfaction or happiness. This concept underpins much of the demand theory, where it is assumed that consumers make purchasing decisions to maximise their utility subject to their budget constraints.

But does it always hold true?

Smartphone Purchases: Customers often compare various models’ features, prices, and performance. A consumer might decide to buy a more expensive smartphone because it offers higher utility in terms of functionality, brand prestige, or longer battery life. This decision-making process illustrates how consumers weigh different factors to maximise utility. However, it also highlights deviations from strict utility maximisation due to branding and marketing effects, which can influence consumers’ perceived utility. The new iPhone 14 Max Pro 1TB is $1400 compared to the OnePlus at $500! Can there be $900 dollars’ worth of benefit from the more expensive phone? Moreover, social pressure can be created around new luxurious purchases such as phones, partly driven by excellent, impactful advertising that is associated with monopolistic and oligopolistic competition. This ‘keeping up with the Joneses’ behaviour is often observed, whereby the price of acceptance, socially, can be an unaffordable luxury purchase! In this case, there is a rational, but high opportunity cost.

Budget Airline Flights: The growth of budget airlines offers an example of consumers trading off comfort for lower prices. Many travellers choose budget airlines to save money, despite the reduced comfort and convenience, showing a clear example of consumers making decisions that maximise their overall utility by prioritising cost savings over other factors. However, much more expensive business class seats exist, which again could be argued as worth it, if the consumer can afford it! This then represents a question of opportunity cost and how that will change according to consumers income, savings and assets! Beyond a certain point, the opportunity cost falls significantly if the consumer’s budget constraints do not exist! This however is representative of a tiny fraction of the overall consumer base in terms of very high incomes and wealth. Time constraints may also be relevant here, in that, bargain flights could be available, but the cost of surveying several websites or constantly watching price fluctuations may be too high for most rational consumers. In this case, the conditional for rationality of perfect information is not met! Or, another way of looking at the problem is that too much choice is actually overwhelming for consumers.

Health-Conscious Eating Trends: The increasing trend of health-conscious eating and the consumption of organic food products illustrate how consumers’ utility maximisation can extend beyond immediate sensory satisfaction to include health benefits and ethical considerations. This shift in consumer preferences indicates how utility maximisation is subject to changes in consumers’ values and information availability, but also takes a different role depending on short term versus long term perspective. Higher prices for organic food in the short term may be considered to yield longer term benefits, which in an economic sense is a good justification, simply swapping the idea of investment from physical assets into investing in long term health!

Investing for the future:

Another point worth examining is the rationality tied to investing. Property prices can be assumed to rise in the future (in certain desirable areas, such as London) due to limited supply of new housing stock and falling supply through increased supply of rental units (due to rising rents). However, consumers can be prevented from access to the markets through unaffordability of accessing entry level housing. Average property prices in London now stand at £500,000 and with average salaries £44,000 giving a mortgage multiplier of 11 times salary, which for the vast majority of workers rules them out of the lending market! Moreover, whilst you cannot buy, you are forced to rent which lowers the ability to save, creating a trap in which investing (whilst rational) becomes impossible!

Speculation or investing: A principle in economics is ‘bounded self-control’, whereby rational consumers’ choice making can be influenced or hijacked by others. Speculation is a good example whereby consumers can be encouraged to invest in speculative or high risk investments. Often people assume that if a high risk is taken, there must be a high reward! This linkage is anecdotal and misunderstood. The market for NFT is a good example. The NFT art market crash of 2023 is a good example of a market that was so new and exciting, that many unseasoned investors entered off the back of very exciting price rises! However, the market for NFT’s crashed in 2023, leaving many investors with an NFT that had close to no value and no underlying asset (in the traditional sense).

Electric vehicles (EV): Why do consumers pay significantly more for an electric vehicle than the market price for a petrol car? One argument could be that petrol cars are going to be phased out, so they aim to beat this legislation or occurrence. However, there is also evidence of some signalling behaviour. This means that the purchase of an EV will confer social benefits due to the consumers appearance as environmentally concerned. Whilst this is a rationale, does it necessarily maximise utility and conform to rationality in the economic sense?

Conclusions?

While the examples above illustrate that consumers always seek to maximise their utility, their methods of operating often do not conform to rationality! Consumers highlight the complexity and variability of consumer behaviour. Real-world consumer behaviour often deviates from the simplistic models of utility maximisation due to, information asymmetry, psychological and social Influences, signalling behaviour and behavioural economics insights

The assumption that consumers always seek to maximise their utility provides a useful framework for understanding consumer behaviour and market dynamics. Real-world examples illustrate the principle in action but also highlight the complexity and multifaceted nature of consumer decision-making. While the utility maximisation principle is a cornerstone of economic theory, it is essential to consider the broader set of factors that influence consumer behaviour in real-world contexts.