Theoryof Consumer Choices
Theoryof Consumer Choices
Thetheory of consumer choices is used to analyze the key factors thatinfluence the decisions made by buyers. The theory is used to explainthe demand curves as well as consumption expenditures (Gans, King, &Mankiw, 2011). It is also used to describe how consumers maximizetheir utility, in spite of their constraint budget. In this paper,the impact of the consumer choice theory on demand curves, higherinterest rates, and higher wages will be discussed. In addition, therole of the concept of information symmetry in economic transactions,the function of the arrow’s impossibility theorem and CondorcetParadox, and consumers being irrational will also be considered.
TheImpact of Consumer Choice Theory on Demand Curves
Individuals’decision to consume different products is guided by variousmotivations and abilities. Some of the key factors that determine theamount of a given product that is demanded by a particular consumerinclude the level of wealth, the price of the commodity, and that ofalternative goods (Gans, King, & Mankiw, 2011). A decrease in theprice of a given commodity will lead to a rise in the quantity thatis demanded. This occurrence is attributed to the fact that thepurchasing power of the consumers will automatically increase.Therefore, their choices will favor the commodity, leading to anupward or the rightward shift in the demand curve (from A to B inFigure 1).
Anincrease in the price of a given product leads to a commensuratedecline in the quantity that is demanded. This trend can beattributed to the fact that the consumer is able to make a choice andgo for alternative goods that have the capacity to satisfy the sameneed. This leads to a shift in demand curve from B to A (Figure 1).Similar shifts take place when prices of related goods go up or down.
Figure1: Shifts in the demand curve
Source:Gans, King, & Mankiw (2011)
TheImpact of Consumer Choice Theory on Higher Wages
Thetheory of consumer choice can impact higher wages in negative andpositive ways. A raise in the price of the commodity will create ascenario in which the proportion of the wage spent on it increases(Inganga, Njerul, Ombui & Tirimba, 2015). A decrease in the priceof a given commodity, on the other hand, will affect the high wage ina positive way since the consumer will spend less to acquire theproduct. This influences consumer choice in favor of alternativecommodities. An increase the desire of consumer for a given commodityleads a rise in its utility. Consequently, the budget increases,which makes the higher wages to appear low. On the contrary, adecrease in the desire of the consumer for the commodity reduces theamount of wage spent on the product. This affects the wages in apositive way.
Similarevents happen when consumers are thinking of purchasing relatedproducts. The consumer will choose not to purchase related goods whentheir price increases. However, they can decide to buy alternativeproducts with lower prices, which imply that high wages may not beaffected (Gans, King, & Mankiw, 2011). Similarly, the high wagesmay remain unaffected when the prices go down since consumers willspend a smaller percentage of their wages. Therefore, the impact ofthe consumer choice theory on higher wages depends on changes inprices of commodities, alternative goods, and desire of theconsumers.
TheImpact of Consumer Choice Theory on Higher Interest Rates
Thetheory may also affect the higher interest rates in negative orpositive ways. The impact of the theory may also be influenced by theprice of a particular commodity. For example, an increase in itsprice will force consumers to reduce their consumption rate. Thiswill lower the interest rates and force the demand curve to shifttowards the left hand (Gans, King, & Mankiw, 2011). This trend isattributed to the fact that the purchasing power of consumers willreduce, thus increasing the interest rates. A decrease in the priceof the commodity, on the other hand, enables consumers to increasetheir consumption rate, which lowers the higher interest rates.
Theexpenditure of consumption is another key factor that influences therelationship between the theory and higher interest rates. Theinterest rate is likely to remain high when the expenditure ofconsumption increases. This is because buyers are likely to spendmore of their money on the product that they prefer, which impliesthat the interest rates will remain higher (Gans, King, & Mankiw,2011). However, a decrease in the expenditure of consumption leads toa decline in higher interest rates.
Anotherfactor that may influence the impact of the theory on higher interestrates is the wealth of the consumer. A decline in the wealth of theconsumer leads to a decrease on the quantity of the preferredcommodity that is purchased by the consumer. This forces the marketto lower the interest rates (Inganga etal.,2015). An increase in the wealth of the consumer, on the other hand,raises the quantity of the preferred commodity that is purchased.This enables the market to raise the interest rates, thus making themremain higher.
TheRole of the Asymmetric Information on Many Transactions
Informationsymmetry takes place when one party has more information about a giveproduct compared to the other. This leads to a situation referred toas adverse selection where consumers choose products using limitedinformation (Plesco & Sobol, 2012). For example, Wal-Mart sells awide range of products. The company has a lot of information aboutall these products while consumers know little about them. Therefore,consumers are likely to base their information on the price tagsplaced by the supermarket since the information about theirrespective qualities is not disclosed. Since the supermarket sellsmultiple products, it may play with the psychology of the consumersby raising prices of certain goods in order to create a perceptionthat they are of higher quality than their actual value.
TheCondorcet Paradox and the Arrow’s Impossibility Theorem inPolitical Economy
Theparadox holds that each consumer must have a given preferred product,but the market does not have a unique commodity. In a politicalmarket, there has to be a preferred commodity, but it cannot beconsumed uniformly. This creates a cyclic situation where differentconsumers have dissimilar choices of the preferred commodities(Swaminathan, 2013). For example, there is no particular commodity inWall-Mart Supermarkets that can be considered to have won the titleof the most preferred since each one of them has a population ofconsumers who like it.
Theimpossibility theorem, on the other hand, holds that each consumerhas an order of preferences with no dictatorship (Swaminathan, 2013).Therefore, consumers in a political economy have the opportunity tochoose products that they believe are of importance to them. Forexample, political economy consumers will make independent choicesand select commodities that address their needs.
PeopleBeing Irrational in Behavior Economics
Consumerswho are not rational may be influenced by marketers since theirbehaviors are not based on their own thought processes. Thelikelihood of selecting commodities that satisfy their needs dependson luck. They may be influenced to make the right or wrong choices(Gans, King, & Mankiw, 2011).
Theconsumer choice theory provides a vivid explanation of the factorsthat influence the decision made when purchasing different goods.Some of the key factors include the price of the commodities,consumer preferences, availability of alternative brands, and changesin the wealth of the consumer.
Gans,J., King, S. & Mankiw, N. (2011). Principlesof microeconomics.South Melbourne: Cengage Learning.
Inganga,B., Njerul, N., Ombui, K. & Tirimba, I. (2015). Factors affectingcustomer demand of financial services offered by commercial banks inNairobi County. InternationalJournal of Scientific and Research Publications,4 (11), 1-25.
Plesco,O. & Sobol, L. (2012). Theissue of asymmetric information upon the capital market.Alexandru: Cuba University.
Swaminathan,A. (2013). Arrow’simpossibility theorem on social choice systems.Cambridge, MA: Harvard University.