HL only This topic is for Higher Level students.
Standard theory assumes consumers maximise utility and firms maximise profit. Behavioural economics tests these assumptions against how people and businesses actually behave.
Traditional demand theory rests on three assumptions about consumers.
| Assumption | Meaning |
|---|---|
| Consumer rationality | Consumers weigh up costs and benefits carefully and make consistent choices in their own interest |
| Utility maximisation | Consumers choose the combination of goods that gives them the greatest total satisfaction from their limited income |
| Perfect information | Consumers know all prices, product qualities and alternatives before they choose |