Theories Of Consumer Choice Theory
Consumer choice denotes the decision an individual will have to make on the products or services they wish to purchase. Theory of consumer choice thus analyses how individuals decide to spend their money keeping in mind their preferences as well as budget constraints. It assumes that people will want to maximize their utility through an optimal combination of goods that they can afford.
This theory has three underlying assumptions:
The first being utility maximization, which is the level of happiness the individual, will reap from the items they choose to purchase. Secondly the principle of non-satiation, no matter how much of an item you consume you will never achieve complete satisfaction. Finally decreasing marginal …show more content…
The effect of higher wages on consumer choice grows more complex as the type of good changes, as different goods show different properties in terms of consumer utility and preference. It is thus important to differentiate the effect of higher wages on normal, inferior, complementary and substitute goods:
• Normal: This is a good in that has a simple linear relationship with income. An increase in income will lead to an incremental increase in quantities consumed. This is because there is increased utility with increased consumption.
• Inferior: These are goods that are less preferred relative to goods of the same type. They have an inverse relationship with income. This is because the consumer derives minimal utility in purchasing it relative to others. Thus when income increases the consumer will buy less of it n favor of “better” goods.
• Complementary: These are goods that are used in conjunction with other goods and thus are consumed together, for example vehicles and car insurance. As income increase so will the relative consumption of the complimentary items.
• Substitutes: This are goods that can be interchanged, the consumer can use ne in the place of the other to achieve the same level of utility. As income increases the consumption of these goods will be affected …show more content…
There can be increased expenditure or increased savings among the consumers. Keynesian economic theory has two economic forces influenced by change in interest rates: the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). They refer to the amount of disposable income consumers tend to spend or save respectively.
Higher interest rates can lead to increased savings due to higher expected rates of return on savings. This is due to the substitution effect; current consumption will become more expensive relative to saving.
The role asymmetric information has in many economic transactions
Asymmetric information comes about when one party of a financial transaction has more knowledge on the subject matter more than the other concerned parties. A good example would be the purchase of a used vehicle, the seller will obviously know more about the cars conditions compared to the customer (Fukuyama & Weber, 2009). This would be an advantage to him if the car has some underlying problem that is not obvious to the customer at the time of the transaction.
This provides an incentive for sale of goods of lower quality since the consumer cannot tell the difference. Information asymmetry is thus key in getting an upper hand in economic transactions.
The Condorcet Paradox and Arrow's Impossibility Theorem in the Political