Consumer Choice
Consumer choice refers to the decision-making process through which individuals select from a range of goods and services based on their preferences, budget constraints, and utility maximization. It is a fundamental concept in economics that explores how consumers allocate their limited resources to maximize satisfaction and achieve the highest level of utility.
6 Key excerpts on "Consumer Choice"
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...7 Consumer Choices Plate 7.1 Consumer Choices Synopsis In a market economy, consumers are the driving force behind all production decisions, since successful business firms “give consumers what they want.” This chapter enhances the understanding of how consumers decide what to purchase. Economists consider consumers to be rational, or purposeful and consistent. This assumption allows economists to predict and explain Consumer Choices. In particular, they are able to make strong predictions about how consumers respond to changes in income and relative prices. The law of diminishing marginal utility explains why consumers prefer variety. Real-world examples include meat consumption in the US and China, and the diamond-water paradox. 7.0 Introduction The circular flow diagram in Chapter 1 summarized an economy composed of two groups: producers and consumers (see Figure 1.1). The next several chapters of this book explained the profit-maximizing behavior of producers. Very little was said about consumers. That leaves the question, “What role do consumers play in a market economy?” Consumers spend their incomes on the goods and services produced by firms. In a market economy, consumers are the driving force behind all production decisions, since producers will give consumers what they want by responding to relative prices. This chapter explains the behavior of consumers, and the following chapters explain the interactions between producers and consumers in domestic and international markets. The lessons begin with a study of rational behavior: the consumers’ counterpart of profit maximization. 7.1 Rational behavior Economic logic assumes that all human behavior is purposeful and consistent. The term Rational Behavior in economics is different from the dictionary definition of the term...
eBook - ePubEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...Section 3 introduces utility theory, a building block of Consumer Choice theory that provides a quantitative model for a consumer’s preferences and tastes. Section 4 surveys budget constraints and opportunity sets. Section 5 covers the determination of the consumer’s bundle of goods and how that may change in response to changes in income and prices. Section 6 examines substitution and income effects for different types of goods. A summary and practice problems conclude the chapter. 2. CONSUMER THEORY: FROM PREFERENCES TO DEMAND FUNCTIONS The introduction to demand and supply analysis in the previous chapter basically assumed that the demand function exists, and focused on understanding its various characteristics and manifestations. In this chapter, we address the foundations of demand and supply analysis and seek to understand the sources of consumer demand through the theory of the consumer, also known as Consumer Choice theory. Consumer Choice theory can be defined as the branch of microeconomics that relates consumer demand curves to consumer preferences. Consumer Choice theory begins with a fundamental model of how consumer preferences and tastes might be represented. It explores consumers’ willingness to trade off between two goods (or two baskets of goods), both of which the consumer finds beneficial. Consumer Choice theory then recognizes that to consume a set of goods and services, consumers must purchase them at given market prices and with a limited income. In effect, Consumer Choice theory first models what the consumer would like to consume, and then it examines what the consumer can consume with limited income. Finally, by superimposing what the consumer would like to do onto what the consumer can do, we arrive at a model of what the consumer would do under various circumstances...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...Chapter 7 Consumer Choices Photo 7.1 Consumer Choices Source: studio online/Shutterstock Abstract In a market economy, consumers are the driving force behind all production decisions, since successful business firms “give consumers what they want.” This chapter enhances the understanding of how consumers decide what to purchase. Economists consider consumers to be rational, or purposeful and consistent. This assumption allows economists to predict and explain Consumer Choices. In particular, they are able to make strong predictions about how consumers respond to changes in income and relative prices. The law of diminishing marginal utility explains why consumers prefer variety. Real-world examples include meat consumption in the US and China and the diamond–water paradox. 7.0 Introduction The circular flow diagram in Chapter 1 summarized an economy composed of two groups: producers and consumers. Chapters 2 through 6 explained the profit-maximizing behavior of producers. This chapter answers the question: what role do consumers play in a market economy? Consumers spend their incomes on the goods and services produced by firms. In a market economy, consumers are the driving forces behind all production decisions, since producers will give consumers what they want by responding to relative prices. This chapter explains the behavior of consumers, and the following chapters explain the interactions between producers and consumers in domestic and international markets. The lessons begin with a study of rational behavior: the consumers’ counterpart of profit maximization. 7.1 Rational behavior Economic logic assumes that all human behavior is purposeful and consistent. The term “rational behavior” in economics is different from the dictionary definition of the term...
eBook - ePubEconomics After the Crisis
An Introduction to Economics from a Pluralist and Global Perspective
- Irene van Staveren(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...3 Consumption 3.1 Consumer demand 3.1.1 Individual consumer demand This chapter discusses Consumer Choices. Consumers express agency in consumer markets, under the agency constraints of incomplete information, limited capacity for processing information, risk, uncertainty, and institutions. There are three categories of goods that households demand: final consumer goods, for end use, durable consumer goods, for long-term use and to make domestic labour more efficient, and intermediate consumer goods, which are unfinished goods to which unpaid labour is added to produce final consumer goods. Households demand a variety of services, varying from entertainment (theatre, tourism) to financial services (health insurance, pension savings, and investment plans). The biggest consumer demand by households is for housing: this involves renting at a significant percentage of one’s income. Or it involves buying a durable and non-movable good that is frequently worth several times a household’s annual earnings, which often requires a loan (mortgage), generally varying between 25 per cent and 110 per cent of the house value, with a pay-back period of between 5 and 30 years. Consumer demand in almost every economy in the world today requires purchasing power. In capitalist economies, which are in the majority in our world, purchasing power means money, either cash or in bank accounts. Without money, and hence, some source of income or wealth, one cannot exercise demand in a capitalist market. But not only income matters – prices matter too. Hence, what is relevant for a consumer is real income, which is the purchasing power of income, taking prices into account. The cost of a consumer good, however, is not simply the price paid for it and, hence, a subtraction of available purchasing power. The cost of a consumer good is also its opportunity cost : the value of the alternative forgone. When you buy jeans costing $75, you can’t spend this money on shoes anymore...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...At a personal level, we have limited income to spend on the many items we want. For example, we might forgo purchasing a Toyota RAV4 in order to have funds to pay tuition at University of Wisconsin. Businesses also face alternatives. Should a company use its scarce funds to replace its photocopiers instead of buying new computers? Moreover, the government has to make choices. Should tax dollars be used to purchase additional tanks and missiles, or should these dollars be used to finance the construction of a new highway system? The field of economics is quite broad. Its reach extends from personal concerns—why does a pound of butter cost more than a pound of margarine?—to issues of national and global importance—will an economic slump in Asia cause the U.S. economy to decline? The field of economics is generally divided into two categories—microeconomics and macroeconomics. Microeconomics Microeconomics is the branch of economics that focuses on the choices made by households and firms and the effects those choices have on particular markets. We can use microeconomics to understand how markets work, to make personal or managerial decisions, and to analyze the impact of government policies. Consider these microeconomic questions: How would a higher tax on cigarettes affect consumption by teenagers? Why do convenience stores often close after several years? How would a ban on immigrant workers from Mexico affect U.S. apple growers? Should I put my savings in a bank account or invest them in the stock market? Will an increase in the federal minimum wage help the working poor? Macroeconomics The other branch of economics is macroeconomics. Macroeconomics is concerned with the overall performance of the economy. Macroeconomics does not focus on the activities of individual households, firms, or markets; instead, it focuses on the behavior of the economy itself...
eBook - ePub- Morris Altman(Author)
- 2012(Publication Date)
- For Dummies(Publisher)
...The focus of much economic analysis is on how much and what is purchased on the market — from apples and oranges, to plants and equipment, to labor. This type of analysis, the conventional wisdom would have us believe, doesn’t require non-economic add-ons.In a nutshell, conventional economists assert that when engaging in economic decisions, people are most concerned with the following:Income:Information on income tells people what economic resources are available to them and what constraints they face when making economic choices. People’s choices are constrained by their limited or scarce resources.Relative prices:Relative prices provide people with information on how much income they must sacrifice to purchase one commodity as compared to some other, preferred commodity. If someone spends $5 on soup, he or she has $5 less to spend on cheese, tofu, or fish. When the price of one desired commodity increases relative to the price of another, people tend to search for less-expensive substitutes to minimize the sacrifice they must make.When price goes up, the quantity demanded goes down. When price goes down, the quantity demanded goes up. When income goes up, the quantity demanded goes up. When income goes down, the quantity demanded goes down. This is how economists expect you and society to behave, on average. In fact, this expectation is pretty much what occurs in the real world. Economists even refer to regularities as laws, such as thelaw of demand(which specifies the expected negative relationship between price and the quantity of a commodity demanded at alternative prices given income).Figure 4-1 illustrates the law of demand using the demand curve, for the individual, which is standard fare in the economics toolbox. Thedemand curvetells how much of a good or service a person is willing to purchase at alternative prices. This assumes that the prices of all other goods and services are held constant...
