Theory of consumer

From CEOpedia | Management online

Theory of consumer is an economic theory that explains how individuals, households and firms make decisions when spending money. It is based on the principle of maximization of satisfaction, i.e. how individuals decide to allocate their resources, such as time and money, to purchase goods and services. The theory also takes into account the concept of utility, which is the pleasure or satisfaction derived from consuming a good or service. This theory is important for managers as it helps them understand how consumers make purchase decisions, which in turn provides them with insights into how to price, promote and package their products and services in order to maximize the satisfaction of their customers.

Example of theory of consumer

  • The Law of Diminishing Marginal Utility is a core concept in the theory of consumer behavior. It states that as a person consumes more of a good or service, the satisfaction or utility they derive from each additional unit will decrease. For example, if a person is eating a piece of chocolate cake, the first bite will be the most enjoyable and each additional bite will result in a decreased satisfaction. This concept is important in economics, as it helps explain why individuals may not purchase a good or service in unlimited quantities.
  • The Price Elasticity of Demand is another core concept in the theory of consumer behavior. It measures the responsiveness of demand for a good or service to a change in its price. If demand for a good is elastic, a small increase in price will result in a large drop in demand, while if demand is inelastic a small increase in price will only result in a small drop in demand. This concept is important for businesses as it helps them understand how sensitive their customers are to changes in prices and allows them to set optimal prices for their products and services.
  • The Theory of Consumer Choice is another concept in the theory of consumer behavior. It states that individuals make purchase decisions based on their preferences for different goods and services. It states that individuals will choose to purchase those goods and services that give them the highest level of satisfaction, given their available resources. This concept is important for businesses as it helps them understand what drives customer decision making and allows them to better target their products and services to the right customers.

Types of theory of consumer

The theory of consumer consists of several different theories that analyze how consumers make decisions when spending money. These theories include:

  • The Utility Theory: This theory states that consumers seek to maximize their utility or satisfaction from the goods and services they purchase. It is based on the idea that consumers have a set of preferences and will choose the item that gives them the highest satisfaction.
  • The Marginalism Theory: This theory states that consumers make purchase decisions based on the marginal utility of the product or service. The marginal utility is the additional satisfaction achieved from consuming one more unit of the good or service.
  • The Indifference Curve Theory: This theory states that consumers choose the combination of goods that gives them the most satisfaction by plotting their preferences on an indifference curve.
  • The Revealed Preference Theory: This theory states that consumers reveal their preferences through their purchasing decisions. It is based on the idea that individuals reveal their preferences by how they allocate their resources.
  • The Behavioral Economics Theory: This theory states that consumers make decisions that are influenced by psychological and emotional factors. It is based on the idea that individuals are not always rational decision makers and that their decisions are often influenced by biases, emotions, and other irrational factors.

Advantages of theory of consumer

The advantages of Theory of Consumer are:

  • It helps to understand how consumers make purchase decisions, providing insights into pricing, promotion, and product packaging.
  • It takes into account the concept of utility, which is the pleasure or satisfaction derived from consuming a good or service.
  • It helps managers to identify and address customer needs and preferences.
  • It helps businesses to develop effective marketing strategies, by providing information about consumer preferences, buying habits, and market trends.
  • It helps businesses to plan and budget effectively by providing insights into how much customers are willing to pay for a certain product or service.
  • It helps businesses to effectively utilize resources and to identify potential opportunities in the market.

Limitations of theory of consumer

The theory of consumer has several limitations. These include:

  • Ignoring external factors: The theory assumes that consumers make decisions based solely on their own preferences and not on external factors such as government policies, social norms, and economic trends.
  • Focusing on short-term decisions: The theory fails to take into account long-term decisions and how they might be impacted by changes in the market.
  • Ignoring public goods: The theory does not consider public goods, such as clean air and water, which are essential for the functioning of society.
  • Ignoring the effect of advertising: The theory does not take into account the influence of advertising in influencing consumer decisions.
  • Ignoring collective decision making: The theory assumes that all consumers make their decisions independently, without considering how their decisions might be affected by the decisions of others.
  • Ignoring the psychological aspects of purchasing: The theory does not take into account the psychological aspects of purchasing, such as emotions, feelings, and motivations.


Theory of consumer — recommended articles
Theory of consumption — Consumption function — Hicksian substitution effect — Indifference curve and budget line — Market dynamics — Diminishing marginal utility — Demand — Demand curve shift — Normative economics

References

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