Consumers’ economic rationality in market and non-market systems

Subject: Economics
Pages: 9
Word count: 2472
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The study of markets has recently played quite an essential role in the field of economics, in the view that mechanisms of the market are usually of vital significance in the modern economies as it has been throughout the history. Social economy is often rooted in both the economic and also non-economic institutions. The inclusion of the non-economic market is usually quite essential for any form of government as it helps in structuring the functioning of the economy into financial institutions or availability of tools or machines that would contribute to lightening the toil of labor.

Economics has always been concerned with the different motivations and behaviors of the consumers. The rational consumer behavior is believed to be the chief governor of most conducts in the economic markets due to the consumer’s self-interests and also due to the market’s tendency of punishing any foolish consumer behaviors.  The rational man of economics can be viewed as being a maximizer who is known for settling for nothing less but the best. Despite the fact that this particular model of the rational man has dominated the contemporary economic analysis, there has been history among economists who question its behavioral validity hence seeking for alternatives.

Among the main assumptions that underlie economics is the concept of the rational consumer where it is assumed that people know what they want and always seek to maximize the available resources given the scarcity and constraints, they may be facing. The rational choice theory is the famous approach used by the social scientists to further understand the human behavior. (Frenzen, Hirsch & Zerillo, 1991). This particular approach has long been dominant in the area of economics but has recently been in use in other disciplines such as sociology. This study aims to analyze the consumer rationality in both the market and nonmarket economic systems. The study will also examine how these particular economies acquire their stability and how the consumer and citizen rationality affect their operations.

The market and nonmarket system approach

A market economy is usually the economic systems in which individuals have ownership of most resources such as capital and land in a particular region, where they control their use through their own voluntary decision which they make in an individual marketplace. The market economy is usually based on the interactions between supply and demand that determines the prices of goods and services offered by the sellers.

The nonmarket system, on the other hand, is the kind of market that the government plays an upper role in controlling the use of resources including their pricing. Non-economic forces usually work on the economic factors from outside the market system. These systems typically comprise of organization and correction of factors that tend to provide order to the market and any other societal institutions to enable them to function efficiently (Rychard, 2009).

Both of these economies tend to focus on the consumers, leading to the issue of consumer rationality. The concept of consumer rationality can be expressed in various formulations. However, it is normally beached on the concept that consumers and citizens tend to be the best adjudicators of their interests and that their monetary preferences are usually effective in progressing their self-interests. Furthermore, decisions of the consumers have been known to give sellers motivation and directions in which they should lead such that the demand of the customers about a particular product directly affects its supply. The customer is seen as king because the welfare of the producers is anticipated to come in line with the happiness of the consumers and not vice versa.

For the economy to develop, consumers need to consume products in both the market and the nonmarket systems. There are three main conceptions of the consumption in both the market and the nonmarket economies. This comprises of the productive consumption that was formulated in the seventeenth century, the idiosyncratic consumption-formulated in the nineteenth century and finally the functional consumption. These types of consumptions led to the development of the contemporary economies (Frenzen, Hirsch & Zerillo, 1991).

When it comes to the competition in the market economy, the commitment of resource is usually the primary factor in shaping its outcome. However, in the nonmarket competition, the ballots are usually the major feature and do not often mirror the strength of the penchant the way that the obligation of the private assets does. This basically means that when there is the subject of money in the market environment, the number of components total in the nonmarket environments.

Some proceedings that may be forbidden in the market environment are usually acceptable in the nonmarket environment. Such things as collusions among companies in the market environment are typically illegal, whereas collusions among organizations in the nonmarket environments are allowed. For instance, trade associations are not allowed to synchronize the activity of their associates but are able to coordinate the entrance by their affiliates on a bill before the senate.

The accomplishment in the market environment is usually assessed in stipulations of earnings produced or even the value produced while the performance in the nonmarket environment is often evaluated through the use of some broader dimensions such as ethical ideology and notion of accountability. These variations usually mean that the theories including the theoretical frameworks for the assessment of the market environments and analysis and formulation of the strategies need to be complemented with the approaches that would unambiguously take these variations into account.

The market conditions are usually distinguished by the number of the industrial rivals, their simplicity of exit and entry, their cost structures, their rates of technological progress and also their nature of demand and competitions among others. The market analysis further goes on to focus on the structure of the industry including its performance, its unique capabilities and also its competencies and market sections.

The basis of the competitive strategies is usually offered by the subject of economics as applied to the modest investigation. In the market economy, steps from the analysis to the procedures usually involves, for instance, the assessment of the companies abilities to pact with the Porters five forces where the stratagem formulations usually involve selection of broad competitive approach and choosing of some particular line of actions.

The nonmarket environment, on the other hand, is quite dissimilar as it is usually distinguished in terms of issues, establishments, benefit and information. For instance, in the field of telecommunication, the particular issue comprise of the bill that was introduced in the Congress to allow a particular company to produce the telecom equipment.

For most companies, the success of their nonmarket environment is quite significant for the accomplishment in their market environments. This means that any valid business strategy needs to have both the market and the nonmarket mechanisms. Organizations, however, view the nonmarket environments as being quite complicated in comparison with the market economies due to the fact that the market contributors are usually not the only ones that are enfranchised to take part and also that the conclusion in the nonmarket systems are usually made in the civic institutions. In order to effectively deal with the nonmarket subject, the participants require to come up with the nonmarket strategy systems that would be able to bring together both the acquaintance of the environment and the forces that would outline it with the purposes and proficiencies of the company. The nonmarket strategic structure is usually comprised of conceptual frameworks including some core approaches that would be used in guiding the leaders in their decision-making for bringing the components together (Rychard, 2009).

How rational theory applies in the society and economy

The rational choice theory is usually based on the assumption that the interests of the consumers are usually advanced by their economic opportunities. The rational choice theory tends to assume that the consumers generally behave rationally and that their choices often ratify their welfare. If not the options of these consumers can be seen to present their exodus from rationality. In this logic, any irrational choice behavior from the consumers can be seen as an opening for possibilities that the sellers can take advantage of in order to seize some economic powers from the customers.

The rational choice came about from the economic understanding of the way prices including allocations of limited possessions can be elucidated by the way that individuals tend to judiciously maximize their effectiveness in relation to the costs. The rational choice theory has been known to borrow the principle of projected utility from the economics which affirm that individuals tend to regulate their behaviors in accordance with rational decisions on the basis of straightforward cost-benefit analysis. In the field of sociology, the rational choice theory is usually referred as the exchange theory which can refer the body of theories that tries to elucidate the characteristic of the social life through some premeditated proceedings of people including those who may be most improbable to be receptive to the calculative measures such as personal affairs.

Over a period of time, rational choice theory has been associated with other various sociological customs most outstandingly within the feat frame of the position, the network theory, and the organization theory. An instance of rational choice theory is the Adam Smith’s theory of labor division that was introduced in 1776 which suggests that the outcomes of the free markets comprise that self-regarding people are usually sensible enough to uphold the public goods.  This means that individuals tend to make economic decisions based on their personal interests which in turn promote the public goods. The key to comprehending the rational choice theory is, therefore, the supposition that if individuals create choices and go on to act in accordance with their resolutions they usually do so in their own personal interests. This does not automatically mean that citizens tend to be self-centered, but it means that they tend to rationally determine the best probable course of actions in conditions of what it would charge and also the reward they would achieve from that particular decision (Rychard, 2009).

Role of consumers and citizens in the socioeconomic development

The socioeconomic development can be termed as a process of both the social and economic development in a particular society. The social, economic development is usually measured through various indicators such as the country’s GDP, employment levels or even the life expectancy of a particular region. This kind of development is usually affected by changes in changes in other factors such as freedom and safety or personal dignity. The socioeconomic factors are quite essential characteristics that mostly affect the consumers. These factors are usually associated with the quality of life as they tend to determine the behaviors, the tastes, the preferences and lifestyles of people living in a particular society. The socioeconomic factors have been known to have some high impacts on businesses due to the fact that consumers are often the heart of any kind of business.

While sociology has been known to share the assumption of the resource scarcity the discipline also puts in consideration the concept of the demand and consumption less centrality and significance compared to the economics.  In sociology, economists tend to view demands as the self-standing and independent variables that tend to drive both the production of goods and services and also the overall economy. Sociologists usually consider it as the byproduct of the social forces in the society (Rychard, 2009).

The mass-produced goods that were once luxuries often get diffused through the community resulting in the cultural transformation which can be said as being due to the rise of mass consumptions. The abundance of consumption has continued to increase over the years as the technologies of mass production and distribution has allowed more goods and services to be manufactured and also sold at lower prices.  The resulting lifestyle and new products including higher standards of living have been addressed in the discipline of sociology (Frenzen, Hirsch & Zerillo, 1991).

There are various factors that tend to portray the role of the consumers in the socioeconomic development. These comprise of the income capacity of the consumers, occupation, educational levels, and the economic growths.

Revenue capacity of the consumers has been known to determine the amount of money they would be able to spend on any particular product. If a citizen in a particular country has access to some high amounts of income due to employment, or other business ventures, they are usually more likely to spend more on luxurious products. This is usually due to the fact that they are able to easily afford products that low-income earners may not be able to afford. Low-income earners, on the other hand, are usually unable to provide various commodities. Thos struggle to meet their basic needs may blind them from purchasing various products which may lead to very low socioeconomic development in a region with many low-income earners compared to the areas that have high-income earners. It is, therefore, essential for the business people to consider the income capacities of the consumers of a particular region before setting up their businesses (Frenzen, Hirsch & Zerillo, 1991).

Occupation of consumers is another major factor that has been known to affect socioeconomic development of a given area. The occupation of these consumers is usually mainly related to the amounts of income they earn. This means that the low-skilled laborers who work in the menial jobs are not able to make the same amount of money as the corporate managers.  The difference in occupations usually amounts to the difference in the socioeconomic development.

The education level of individuals in a particular location also tends to influence the socioeconomic development of that region. This is because the level of education of a particular person usually affects the kind of occupation they venture in hence affecting their income levels. The consumers with higher levels of education are generally more skilled compared .to those with lower levels of education. More experienced customers tend to get better jobs hence influencing how much they are able to spend in a particular economy. Furthermore, the educated consumers tend to have some different taste of products compared to the uneducated ones.  Due to their education, the educated consumers are usually keener on the content of the products they purchase and may sometimes come out as demanding compared to the uneducated consumers.

The final factors that are concerned with customers which influence socioeconomic development are the economic growth of a particular region. The economic growth and development of a given country usually have a great impact on the social status of its citizens. The emerging economies have revealed that when the country experiences high economic growths, then its citizens usually have better access to incomes. With better access to incomes, they are able to purchase more products hence the increase in the socio-economic development of that region.

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  1. Frenzen J., Hirsch P.M., Zerillo, P.C.  (1991)  Consumption, Preferences and Changing lifestyles. N.J.Smelser, R.Swedberg (eds.)
  2. Rychard. A (2009): Entrepreneurs, Consumers, and Civility: The Case of Poland. V.Perez-Diaz (ed.): Markets and Civil Society. The European Experience in Comparative Perspective, Berghahn Books, New York-Oxford
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