Consumer choice turns out to be one of the fundamental topics that is discussed in Microeconomics. We usually do have such questions in mind like:

  • How are consumer preferences used to determine demand?
  • How do consumers allocate income to the purchase of different goods?
  • How do consumers with limited income decide what to buy?
  • How can we determine the nature of consumer preferences for observations of consumer behavior?
  • How can cost of living indexes measure the well-being of consumers?

The theory of consumer behavior can be used to help answer these and many more questions.

This theory describes the explanation of how consumers allocate income to the purchase of different goods and services.

Steps involved in Consumer Behavior

There are three steps involved in the study of consumer behavior

1.Consumer Preferences

To describe how and why people prefer one good to another.

2.Budget Constraints

People have limited incomes.

3.Given preferences and limited incomes, what amount and type of goods will be purchased?

What combination of goods will consumers buy to maximize their satisfaction?

Consumer Preferences

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

Basic Assumptions for Consumer Preferences

1.Preferences are complete—> Consumers can rank market baskets

2.Preferences are transitive—> If they prefer A to B, and B to C, they must prefer A to C

3.Consumers always prefer more of any good to less—> More is better

These 3 assumptions form the basis of Consumer Theory. Offcourse, they do no explain the consumer preference but these assumptions apply a degree of rationality on them. In the next topic we will be describing how consumer preference can be explained graphically through the Indifference Curve.

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