Consumer choice is one of the fundamental topics in Microeconomics.

Consider a product that you are about to launch in the market. It is an edible product that you know consumers would consumer but how much should you charge? and

how much can you provide at the price you decide to sell in the market? Would this price enable the consumers to prefer your newly launched product compared to the existing competitors of your product?

Questions like these require an understanding of the theory of consumer behavior. 

You would be able to answer the following questions when you go through the concept of consumer behavior.

  • How is the demand for a product determined by the preference of a consumer?
  • How do consumers allocate income to the purchase of different goods?
  • What to buy when you have a limited income?
  • How can the cost of living indexes measure the well-being of consumers?

The theory of consumer behavior can be used to help answer these questions. By definition:

The theory of consumer behaviour/choice, describes the explanation of the allocation of income by consumers to purchase different good and services.

Preference in consumer behavior

There are three distinct steps to explain the concept of a consumer behavior with regard to their purchasing decision

1.Consumer Preferences

Why do you prefer one good for another? What attracted you towards the product you selected. What were the factors that enabled you to buy that particular product? We will study the preferences graphically as well as algebraically in the later posts.

2.Budget Constraints

Now that’s very obvious. You would for sure have a look at the price tag of every product you buy (unless if its an inelastic product) and that price would tend to be one of the factors that determine your buying decision.

To understand budget constraints algebraically, you have to associate the budget constraints with consumer preference to come up with the right decision.

3. Consumer choice

What combination of goods will consumers buy to maximize their satisfaction? keeping an account of your preference as well as limited budget. Consumer choice is the final step where you would be able to understand and decide the best possible choice.

Related: Optimum consumption function

Consumer Preferences

How might a consumer compare different groups of items available for purchase?

What and why do you prefer one good over the other.

That is where we discuss the Market Basket.

A market basket is a collection of one or more commodities. Individuals can choose between market baskets containing different goods.

Note that preferences are independent of income and

Basic Assumptions for Consumer Preferences

In order to develop a model to understand the theory of consumer behavior, we need to make some assumptions about the consumer’s preferences

1. Ranking and comparing preferences

Consumers can rank and compare market basket by being indifferent about it. So for example if there are two market basket, say X and Y, a consumer is able to choose or prefer X to Y or Y to X.

Being indifferent about any of the market basket means you are satisfied(utility) by consuming either of these baskets.

2. Preferences are successive members of a sequence

To simplify this assumptionIf a consumer prefers X to Y and Y to Z, then they must prefer X over Z.

For example, I prefer to get Apple iPhone over Huaiwa, but I also prefer Samsung over Huaiwa.

Now, this also means that I still prefer to buy Apple iPhone over Samsung S8.

3. Consumers always prefer more

More is better than less, even if it’s little more! It still better and consumer tends to feel more satisfied in such a case.

Why these assumptions?

These 3 assumptions form the basis of Consumer Theory. Of course, they do no explain the consumer preference but these assumptions apply a degree of rationality to them.

In the next topic, we will be describing how these consumer preferences can be explained graphically through the Indifference Curve.

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