Consumer Theory
**Consumer theory** is the study of how people choose to spend their money based on their personal preferences and financial restrictions. This branch of **microeconomics** examines how individuals make choices based on their income and the cost of products and services¹. Let's get into the details.
1. **Utility Maximisation**: When purchasing, people try to make rational selections. They buy the things that give them the most advantage, which economists call **maximum utility**. People's consumption decisions are primarily intended to maximise their satisfaction or well-being.
2. **Non-Satiation**: Human needs are rarely met with a single purchase. We have a continual urge for more consumption. This concept of **non-satiation** recognises our insatiable desire for things and services.
3. Decreasing Marginal Utility: As consumers consume more of a product, their contentment decreases. This process is referred to as declining marginal utility. In other words, the more pizza slices Kyle consumes or video games he plays, the less satisfaction he gains from each successive unit.
1. **Utility Maximisation**: When purchasing, people try to make rational selections. They buy the things that give them the most advantage, which economists call **maximum utility**. People's consumption decisions are primarily intended to maximise their satisfaction or well-being.
2. **Non-Satiation**: Human needs are rarely met with a single purchase. We have a continual urge for more consumption. This concept of **non-satiation** recognises our insatiable desire for things and services.
3. Decreasing Marginal Utility: As consumers consume more of a product, their contentment decreases. This process is referred to as declining marginal utility. In other words, the more pizza slices Kyle consumes or video games he plays, the less satisfaction he gains from each successive unit.
To apply consumer theory, we require the following inputs:
A collection of consumption alternatives (combinations of commodities and services).
Each bundle provides utility to the consumer.
Prices are set to each bundle.
Any initial bundle that the consumer currently holds.
Understanding customer behaviour is critical because it has a substantial impact on the demand curve, which is the relationship between a commodity or service's price and quantity demanded. Consumer expenditure accounts for a significant component of the United States' GDP. Reducing consumer spending has an impact on demand, firm earnings, the labour market, and general economic health1.
Consider this example: Kyle has a $200 budget and must choose between pizza and video games. His decisions will follow the ideas of consumer theory.
A collection of consumption alternatives (combinations of commodities and services).
Each bundle provides utility to the consumer.
Prices are set to each bundle.
Any initial bundle that the consumer currently holds.
Understanding customer behaviour is critical because it has a substantial impact on the demand curve, which is the relationship between a commodity or service's price and quantity demanded. Consumer expenditure accounts for a significant component of the United States' GDP. Reducing consumer spending has an impact on demand, firm earnings, the labour market, and general economic health1.
Consider this example: Kyle has a $200 budget and must choose between pizza and video games. His decisions will follow the ideas of consumer theory.
Tags:
B.A Economic