Homo economicus

In this article we explain what is behind the model of homo oeconomicus and what consequences can be derived from it. In addition, we go into the terms: homo oeconomicus example and homo oeconomicus Definition a.

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  • Homo economicus definition
  • Homo economicus model
  • Characteristics of the homo oeconomicus
  • Homo economicus example
  • Homo economicus criticism
  • Incomplete information
  • Homo economicus summary

Homo economicus definition

The homo oeconomicus or homo economicus is a model of the rational utility maximizer, which is used in economics in order to be able to explain economic relationships theoretically and to understand them better. It is often used as a basis for many economic models. Nevertheless, the model is often called unrealistic.

Homo economicus model

This model represents the characteristics of homo oeconomicus. In the text below these are then further addressed.

Complete information, rational action, fixed preferences, maximization of benefit, homo oeconomicus

Characteristics of homo oeconomicus

In order to understand the human image of homo oeconomicus, we will first look at its idealized characteristics.

Rational action

The first characteristic of the economic man, as he is also called in English, is the rational action. This means that people, at least according to this model, do not make decisions based on their gut instinct, but rather make all decisions without emotion using their intellect. The goal or purpose of action is always in the foreground. The term ratio comes from the Latin and means as much as reason or calculation.

Benefit maximization and profit maximization

The next feature would be the utility maximized action . This is understood to mean that homo oeconomicus always chooses the alternative that brings him the greatest benefit when making decisions. The user will always choose the bundle of goods that will bring him the most benefit within his limited budget. While one speaks of utility maximization for consumers, profit maximization is the equivalent for producers. Here, the combination of price and production quantity is optimized in order to maximize profits.

Fixed preferences

Homo economicus does not place his inner preferences above external, economic factors when making decisions. For example, if someone used to eat a lot of sweets and no longer does so, they have not changed their behavior because of increased health awareness, but only because the price of sweets has increased.

homo economicus

Thus, the decision was not dependent on a change in his inner preferences, but on external, economic considerations.

Complete information

As a last, but by no means unimportant characteristic, the homo oeconomicus is attributed the complete information. This means that he is fully aware of all decision alternatives and the resulting consequences. One can also use the term full market transparency here.
According to this model the manager of a company knows the optimal price to bring his product to the market with maximum profit or a consumer can find the cheapest among all suppliers.

Homo economicus example

Let us now turn to a short example to illustrate the model pictorially.

Imagine you are looking for a new car. However, since you have a completely rational type you only get offers from down-to-earth quality brands and not from luxury cars. So you are not guided by your emotions.
Now that you have decided on a brand, you are looking for the model that best suits your needs largest Benefit brings. You have a family with 2 children? Then a two-seater convertible brings you very little. So much more you will choose a 5 door van, because it gives you the most benefit.

homo economicus

Your previous cars always had diesel engines. But now you decide to use a gasoline engine. The reason for this is not that you suddenly think more about the environment and the exhaust fumes of diesel engines are harmful to our planet, but that in your city there are recently high taxes for diesel cars and thus high additional costs would come to you. This shows that your Preferences do not change due to internal decisions, but only due to external ones, economic Factors are influenced.
Now that you know exactly what kind of car you want, you compare all the dealers on the market and find the best price. You can only do that because you complete and gapless Information owns.

You will surely notice that this admittedly quite theoretical example quickly reaches its limits in reality. We now come to these criticisms.

Homo economicus criticism

However, the model of homo oeconomicus is also pretty much in the Criticism. Many say that the approach is far too far from reality to draw conclusions from it. Two of the frequently mentioned points are that people act irrationally in reality and almost always have incomplete information.

Irrational action

The first point of criticism is that normal people do not always act rationally, like robots, but often make emotional and impulsive decisions. For example, we are often influenced by Advertising influence and buy products that actually make no rational sense in our situation, but have an appealing design. In addition, entire sectors of the economy are designed to irrational acts. Because smoking cigarettes does not make sense on a rational level. One spends money for something, which has no use for one and even harms the health.
Also a homo economicus never work on a voluntary basis, because from an economic point of view it is the worst possible use of working time.

Incomplete information

Furthermore, in reality, it cannot be assumed that a consumer or a producer has complete information without gaps. This is understandable, because it is not possible for a single person to know the prices of all the products offered in a category. Also, an employer cannot know whether the applicant will be as productive as he tries to market himself to be.

Homo economicus summary

Finally, let us summarize everything once again. The homo economicus model is a theoretical conception of man used in economics to justify and simplify theories. The most important characteristics of homo oeconomicus are:

  • Rational action
  • Fixed preferences
  • utility maximization resp. Profit maximization
  • Complete information resp. Market transparency

However, it should not be ignored that this is an idealized, highly abstracted model, because in reality people are not rational and do not always act to maximize their personal benefit.

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