Consumer Choice Theory: Understanding Motivations and Behavior
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This article explores consumer choice theory, which explains how people make choices based on income and prices. It discusses concepts such as indifference curves, consumer equilibrium, and consumer surplus. By understanding these concepts, you can gain insights into consumer motivations and behavior.
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Running head: ECONOMICS1 Economics Name Institution
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ECONOMICS2 ECONOMICS Introduction Consumer choice theory is a branch of microeconomics that elaborates how people make choices, considering restraints such as income along with the prices of products and services. Utilizing this theory, it is possible to understand how individuals’ tastes as well as income impact on the demand curve. Such consumer choices are among the key factors that shape the entire economy. Breaking down this theory, consumers are capable of choosing different bundles of products and services. Ideally, people select commodities that provide them with maximum benefits, - maximizing utility. By applying theory and cases, consumer choice theory requires inputs such as a set of consumption options and a set of prices that are allocated to each bundle of products and services. Additionally, it also requires the bundle currentlyheld by the consumer, including the amount of utility derived from each bundle by a consumer. There are many factors that motivate individuals to consume, - impulsive and compulsive consumption- and the consumer choice theory addresses these consumption behaviors. The report identifies these behaviors by referring to indifference curves, consumer equilibrium, and consumer surplus concepts. Indifference Curves The indifference curve is also known as the ordinal analysis. The concept makes the assumptions that consumer purchases only two products. The concept stipulates that a consumer behaves rationally, meaning that they aim at obtaining maximum satisfaction from products which they buy (Bordalo, Gennaioli & Shleifer, 2013). The consumer will thus be motivated to consume only when there is a bundle of goods that give them maximum satisfaction.
ECONOMICS3 Nonetheless, the consumer is also motivated to consume only when the prices of commodities are provided in the market and that they remain constant (Freeman, 2013). In the case where a consumer’s limited income is purely allocated to purchase two products, the possibility of consuming one of the products more is achieved by sacrificing or minimizing the consumption of the other commodity. The consumer expresses their satisfaction based on the order of preference. In other words, the consumer is motivated to consume by comparing the satisfaction levels that they obtain from different products based on their quality (Lenfant, 2012). For instance, if a consumer intends to consume or consumes three goods, let say good A, B, and C, and assuming that product B is of greater quality of the three products, the consumer is likely to give preference to product B which is of higher quality (Dustmann, Fasani & Speciale, 2017). Additionally, the consumer also gives second preference to product C if it has of higher quality than product A. finally, the consumer opts to give product A the third preference since it is of the lowest quality. As such, in this instance, the consumer prefers product B for C and product C for A. Depending on the level of satisfaction as well as quality, a consumer then arranges different bundles of goods chronologically depending on the order of preference. The type of ordering that the consumer applies to arrange the products is technically referred to as “Scale of Preference”. In general, consumers obtain more satisfaction from a broad category of products. In the consumers’ schedule, they are clear of their preference (Grabs, 2015). However, in many instances, it is possible for a consumer to across certain bundles of products that offers them the same level of satisfaction. Thus, the consumer impartially prefers the two products since any combination of these goods will provide him/her with the same level of satisfaction. In such an instance, consumers are referred to as being indifferent between such a blend of products (Kim,
ECONOMICS4 et al., 2013). For instance, any combination of product X, Y, or Z can give the consumer a similar satisfaction level. Thus, the consumer appears to be indifferent among different product combinations. The indifference curve thus provides a locus of points that represent the different combinations of goods that yield the consumer with the same level of satisfaction. Basically, the concept portrays that a consumer is motivated to consume products that deliver the highest level of satisfaction and which are of higher quality. Consumer Equilibrium When consumers decide the number of goods and services they are willing to consume, it is assumed that their primary goal is to maximize total utility. While trying to maximize total utility, individuals are often faced with several challenges with the most important constraints being income as well as the prices associated with different products and services that the consumer intends to consume (Burger, et al., 2014). Hence, it is evident that consumers are more motivated to consume when their level of income is high and the price of products and service is low. The efforts put by the consumer to maximize total utility while putting into consideration these constraints is referred to as consumer problem (Larson & Billeter, 2013). The best solution to this consumer problem that involves making a decision on the quantity of product or service that the consumer intends to consume is known as consumer equilibrium. To determine consumer equilibrium, for instance, consider that a consumer intends to consume two products: product A and product B. the consumer is aware of the prices of product A and B and they possess a fixed income or a budget which they intend to use to buy certain quantities of a product A and product B (Paul, Modi & Patel, 2016). Since the consumer already has got a fixed budget which they intend to use, they will buy quantities of product A and B with
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ECONOMICS5 the intention of completely exhausting the budget (Ham & Midden, 2014). The amount of bought of each product is determined by the consumer equilibrium condition. If, for example, the marginal utility per dollar spent on product A was higher compared to product’s B marginal utility, in that case, it makes sense for the consumer to buy more quantities of product A instead of buying more quantities of product B (Foxall & Sigurdsson, 2013). after continuous purchase of product A, eventually, product A’s marginal utility falls as a result of the law of diminishing marginal utility. Thus, the marginal utility per dollar that is spent on the purchase of product A will eventually be the same as that of product B. however, the quantities of the purchased product A and B are not limitless and as such, they not only depend on marginal utility per dollar spent but they also depend on the consumer’s budget. The consumer’s motivation to consume is based on the fact that they want to attain the highest level of satisfaction which should be as per to their income and budget. Most are times when the highest level of satisfaction can be achieved but it requires a lot of money. Hence, consumers may be limited to go for a low level of satisfaction (Chen, et al., 2014). However, they do not intend to remain at the lowest level of satisfaction. Thus, the consumer prefers going for the middle level of satisfaction which can be sustained by their budget and income. At this point, the consumer is said to be in equilibrium because their income and budget are able to sustain consumption of commodity A and B at that level. Consumer Surplus Consumer surplus refers to the difference that amount of money an individual is willing to spend on a good or a service which is provided by the demand curve, and the actual amount that they pay for that good or service. Consumers constantly aim at ensuring that they obtain the
ECONOMICS6 best deal on the goods and services that they buy and consumer surplus is used to measure this complete satisfaction (Jang, et al., 2015). For instance, assuming that a consumer intends to consume $250 on a CD gamer if the person goes to the market and finds that the CD gamer is being sold at $150, then this person is said to have a consumer surplus of $100. Consumer surplus is a welfare’s procedure that is gained by a consumer when they consume goods and service. The concept thus refers to the total satisfaction that consumers receive for which they are not entitled to spend their money to purchase. It is worth noting that the consumer’s ability to pay or the prices that a customer is willing to pay is dependent upon marginal utility that they are going to obtain from a specific product. Consumers will be willing to continue buying a product as long as the utility that will obtain from such consumption is either above or equal to the price (Wang, et al., 2016). However, when the price that the customer is offering and the utility that they obtain from the consumption equal to each other, the customer stops buying due to the fact that marginal utility is subject to diminishing. Thus, as marginal utility diminishes, the potential price or rather the price that a customer is willing to pay also diminishes (Enginkaya & Yılmaz, 2014). When purchasing a commodity, a consumer obtains utility by consuming that product. At the same time, the consumer also loses utility in regards to the price that they have to pay to obtain that good. However, the obtained utility should always be higher than the utility lost. Consumer surplus is thus a concept that explains the behavior of the consumer by defining the gap that exists between the total utility obtained by the consumer after consuming a particular product and the total amount of money that they spend to purchase the product. As the consumer continues to consume, consumer surplus continues to diminish due to the diminishing marginal utility law. The law suggests that the first bundle of a product or a
ECONOMICS7 service that is consumed results in an increased utility that the second unit, which in turn results in higher utility than the third and subsequent bundles (Kastanakis & Balabanis, 2012). For example, a thirst customer will be ready to pay a high price to obtain a soft drink. However, as they drink more of the soft drink, they obtain less utility and the amount that they would be willing to pay for the drink falls. Conclusion Consumer choice theory elaborates how people make choices, considering restraints that comprise of income along with the prices of products and services. Utilizing this theory, it is possible to understand how individuals’ tastes, as well as income, affect the demand curve. Indifference curve, consumer surplus, as well as consumer equilibrium, are concepts that identify the factors that motivate individuals to consume, - impulsive and compulsive consumption. The indifference curve concept notes that consumers are motivated to consume only when there is a bundle of goods that give them maximum satisfaction and when the prices of commodities are provided in the market and that they remain constant. The consumer surplus concept identifies utility as the factor that motivates consumers to consume goods or services. Nonetheless, the consumer equilibrium concept notes that the consumers’ income, as well as the budget, influence their rate of consumption.
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