The standard economic model is a body of knowledge that follows the rational choice theory, which poses that individuals and corporations make decisions that maximize their utility. The standard economic model, also known as conventional or mainstream economics proposes that the prices people pay for goods or services in the market, depends on their direct/indirect utility to humans. The primary assumption of the model is that individuals and corporations both have the same goal; to make profit through rational decisions. For individual consumers, for example, maximizing utility was the main intention while for firms, capitalizing on profit. The ability of either party to make these decisions depends on their income and commodity prices, where if affordable, they are acquired.
While the standard economic model attempts to explain how people behave in the free market, it has come under criticism for its bold assumptions. One primary assumption of the model is that self-interest is every individual’s pursuit. This assumption stems from the belief that every human being is driven by the need to gain financial prosperity, and in every purchase decision, this factor plays a huge role. For instance, if a person buys a brand-new car, the utility is a move that will help them get faster around, to work and social gatherings. Thus, the new car will help them improve their movement and the work they can get done if they are always on time. Another assumption is that a decision that yields the best outcome for an individual is necessarily one that benefits society greatly. This assumption is a major operating factor in many firms that assume that if they make big profits, they are contributing to society.
The conventional economic theory also proposes that competitive, rather than cooperative behavior, is the most rational path for firms. This notion has been cited in various policies that propose that when individual firms operate in the same market as adversaries, they get to make society better. Some results of competitive behavior include better practices and reduced costs for consumers. However, a big negative outcome is that increased competition can also lead to reduced incomes and subsequently lesser capability to afford needs and wants. Lastly, another assumption of the model is that human progress can be measured through an examination of the value of goods/services that they consume. Essentially, when individuals give more to society through outputs of funds, they contribute to the economy. These doctrines of the economy have been criticized since they propose that humans are only motivated by greed, something that other models counter.
One model that rejects the propositions of rationality in financial decisions is behavioral economics, which challenges the rational choice theory. One argument is that whereas the rational choice theory assumes that individuals will always choose individual satisfaction, they are also incapable of making the right decisions. The model’s reliance on psychological studies finds that human behavior is irrational, and unlike the expectations of normative economic models, their emotions or distractions can influence them into making decisions that are not in their self-interests. For example, even when someone wants to lose weight, and they know the number of calories present in every food item, they are more likely to be lured by the tasty delights they should not indulge in. An ice-cream will be a likely delicacy for a person trying to lose weight, which explains that individuals are not always driven by rational decision making. Just like someone would purchase an ice-cream on a whim, they can also make a big financial decision that is not in their self-interest, like purchasing a luxury vehicle because it “looks cool.”
Today, the market is different, and firms realize that human beings can be irrational in their behavior, which is a new opportunity for profit. For example, if a soap company sells one product in different packages, “Handwash” and “Handwash Deluxe,” at different prices, both “brands” would attract consumers. Despite being the same product, people would feel compelled to purchase them, proving the irrationality in purchase decision making. Thus, while the standard economic model follows the rational choice theory, behavioral studies continue to reveal that rationality is an option and not a guarantee in economic decisions.
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