Consumer Preference and Microeconomics

Consumer preference and Microeconomics

Ever wondered why there are so many brands out there in the market producing the same goods and services? For instance when you go out to dinner with your friends you realise that most of you are wearing shoes of different brands. You're wearing NIKE while your friends are wearing shoes from Vans, Reebok, Puma, Adidas, Under Armour, etc. 

Popular shoe brands

Well it is not just the numerous number of brands that are available for us but each brand offers a wide range of products to us. Did you know that Starbucks offers over 80,000 different combinations of drinks. They certainly took product diversification to the NEXT LEVEL! 

Everywhere we go we are confronted with endless options of goods and services be it in a grocery store or a movie theatre, the list just goes on. This is because we consumers have preferences. We choose one thing over the other due multiplicity of factors whose study is beyond the realm of economics. But the question remains, what is consumer preference? 

The Underlying Theory 

So what is consumer preference? Consumer preferences are defined as the subjective individual tastes, which are measured by satisfaction that they derive on consumption of various bundles of goods. We economists termed this satisfaction as utility. They allow the consumer to rank these bundles of goods according to the levels of utility they give the consumer, thus enabling him to make an optimal decision for himself. Also, these preferences are independent of the consumer’s income and price of the goods. For instance, a person travelling in an economy class in an airplane would definitely want to travel in the first class but his income wouldn’t let him do so. 

Now, let’s take a look at the assumptions of this theory. There are three main assumptions of consumer choice theory;

1. Completeness: given a set of consumption bundles, a consumer always ranks his consumption bundles according to his preferences.  

2. Monotonicity: this assumption simply says that a consumer would always want more quantity of goods. For instance, a consumer is indifferent between burgers and pizzas but he finds out that the pizzeria near his place has a 1+1 offer on their pizzas then he’d prefer pizzas over burger since he would derive more utility from two pizzas than just one burger. 

3. Transitivity: consumer has a regularity of choices. If a consumer prefers pizzas to burgers and burgers to hot dogs then he would anyday prefer pizzas to hot dogs. 

Now let’s proceed to the approaches of this theory. There are two approaches to the consumer choice theory, namely; Cardinal approach and Ordinal approach.

Cardinal approach given by Classical and Neo-classical Economists, is a quantitative approach wherein the satisfaction derived by the consumer is numerically expressed. The unit of measurement of satisfaction is termed as ‘utils’. This approach is also known as Marginal utility analysis. 

Ordinal approach proposed by the Modern Economists, is a qualitative approach which says utility derived by a consumer cannot be quantified but can be ranked instead. This approach is also known as Indifference curve analysis. 

Determinants of consumer preference

 

While there are numerous factors determining consumer preferences, study of consumer preferences still has a great significance because consumer is a VIP in the economy and analyzing consumer preferences is crucial as it determines the demand in the economy.