We purchase various kinds of products or services. How we actually decide to buy those goods and services is an important question in microeconomics and the answer to that is known as theory of Consumer Preference.
Consumer Choice Theory is the study of how people decide to spend their money based on their individual preferences and budget constraints. The consumer theory is not flawless as it takes into consideration a number of assumptions about human behaviour.
Economists give importance to "satisfaction" as a primary determinant of consumer preferences and a term called "utility" is defined. According to microeconomics, utility denotes the relationship between amount of goods consumed and the amount of happiness or satisfaction that a consumer gets. In other words "utility" describes the taste of consumers and it is the ability of the good to satisfy a want.
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To understand this concept more clearly, let's consider the case of three friends who have recently graduated their high school and are all set to go to the new cities and start their college life. And there is a laptop too in their shopping list. We know that the laptop market is mainly dominated by Windows laptops and Apple laptops called Macbooks. Armis enjoys photography and making videos and he plans to start a YouTube channel also in college. Therefore, he decided to go for Macbook over a windows os based laptop as he assigned more utility to the former than the latter. Suppose he assigned the MacBook a total utility of 10 utils and a total of 7 utils to the Windows Laptop. However, these numbers were opposite for Athos and Porthos who enjoyed playing games. They preferred windows over the Mac laptop. This approach is known as the Cardinal Utility method, where the satisfaction derived by the consumers can be quantitatively expressed.
Now Athos ended up purchasing Dell XPS laptop while Porthos purchased Lenovo Legion laptop. They both ranked one brand over the other and there can be many reasons for it. However, this approach of not assigning any numerical units to the satisfaction derived and qualitatively measuring the utility is known as the Ordinal Utility method. This method is also known as Indifference Curve Approach.
Now let's ponder over the question- Are there any limitations to consumer preferences? Well surely there are! Victor who used to play multiplayer games with Athos and Porthos ended up purchasing Acer Nitro 5 laptop as his finances did not allow him purchase any of those high end gaming laptops. Therefore, budget constraints, availability of the product, need of the commodity are the factors which cap consumer preferences. Thus, the consumer preferences are expected to be in accordance with few rules/ assumptions.
We can either prefer one consumption bundle over the other or be indifferent towards both the bundles. This is called the assumption of completeness. Next, we can say that consumers make consistent choices. If your girlfriend prefers Cappuccino to Espresso and Espresso to Mochaccino, you can surely order Cappuccino over Mochaccino on your date. This is the assumption of transitivity. Now we have the assumption of monotonicity i.e. consumers tend to prefer more to less. Isn't it too relatable? There are other assumptions to consumer choice theory such as the reflexivity and the convexity assumption as well.
Now let's throw some light on why the economists study Consumer Choice Theory and why is it important to to understand Consumer Preferences? The better understanding of consumer preferences has a major role to play in the relationship between the price of a good or service and the quantity demanded for a given period of time, and the shape of the overall economy because the company profits, labour market, investment, etc. depend on consumer purchases. Knowledge about Consumer Preferences also guides the firms to come up with the relevant marketing strategies to expand their reach. It is also the key to profit maximisation strategies of the firms.
