Essay Example on the Theory of Consumers' Choice

Consumer choice theory tries to understand why an individual decides to buy a certain product. It explains that a purchaser buys a good that satisfies him while observing the budget constraint. The hypothesis takes some assumption about the nature of human beings. In economic terms, these three are the principle of non-satisfaction, utility maximization, and decreasing marginal utility. Diminishing marginal utility states that even though a consumer achieves more happiness through increased consumption of a particular good, the pleasure the good delivers to him with an additional consumption decreases. Utility maximization relies on the premise that when a consumer buys a certain good, his motivation behind the decision is that the good makes him happier compared to its substitutes. The principle of non-satiation states that a consumer cannot be fully satisfied no matter the quantity consumed.

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Impact of the theory of consumer choice on demand curves

The hypothesis tries to relate how consumer preferences reflect in demand curves and the accompanying expenditure for a buyer to buy a good. It shows how consumers can satisfy their desires for goods in the market subject to their budgetary constraint. In the demand curves, the theory proves how clients try to increase their utility through consumption of goods based on the demerit their budget poses (Gans, 2011). expenditure differs from one individual to another. A consumer motivation and ability determine his level of consumption. Some of the factors that affect the rate of demand are the income level of consumers, wealth, the price of a good, and prices of the related goods. To have a better understanding, observing the law of demand that states that consumption increases when the price of a good reduces is important.

When the price of a good reduces, the demand curves will show an increase in quantity demanded since people will be willing to consume more of the product. The demand curves shift higher. However, when the price increases, the demand curve will show a drastic decrease for good demanded. Increased cost lowers consumers purchasing power. The increase in wealth and income levels of consumers result to increase in consumption. The demand curves shifts to the right. The reasoning is that consumers will have access to more cash thus will be willing to spend more. Inversely, a decrease in income and wealth levels shifts the demand curves on the left side (Gans, 2011). When the prices of substitute goods reduce, consumers will tend to prefer them. This will shift the demand curve of the good to the left since less of it will be demanded. In cases where the price of the substitute rises, more of the good will demand since consumers will opt for the good that is of lesser price. This will shifts the demand curve of the good towards the right side.

Effect of the theory of consumer choice on higher wages

The consumer speculation affects higher wages both positively and negatively. When consumers desire for a preferred good increases because of the utility the commodity produces, their budget proportion set aside for the good increases. Consequently, this reflects on the higher wages. The higher wages will reduce. If the utility that a consumer gets from the ideal commodity reduces, less proportion of their budget will be allocated to the consumption of the good ( Musgrave,2009). The wages will affect positively since less purchase of the commodity will be made. In addition, when prices of the favored commodity increase, consumers will spend a large proportion of their income on it leading to reduction of the higher wages. Higher wages will be least affected when the price of the commodity lowers since consumers will spend a lesser fraction of their wages on the good.

Effects of theory of consumer choice on higher interests rates

The theory affects higher interest rates positively and negatively. If the price of the preferred good is high, interest rates will remain high. Consumers will spend more on the good to fully satisfy therefore the higher interest rates may even increase. If the cost of the preferred good is low, consumers will spend less. Consequently, higher interest rates will reduce in a bid to attract consumers. When price of the good rises, purchasing power of consumers will decrease. This will lower the demand of the good. In turn, interest rates will go down (Gans, 2011). When the prices increase, consumers will be willing to spend more. This will push the higher interest rates further since demand for loans to access the commodity will increase. Also, increase in wealth and income of consumers pushes the higher interest rates further.

Effects of the theory of consumer choice on the role asymmetric information has in many economic transactions

The effect of the theory is that a high demand of the chosen product increases the role played by asymmetric information in economic transaction. A well known product will attract more sales even when its prices are higher compared to another product which consumers have little information on.

Impact of the theory of consumer choice on the Condorcet Paradox in the political economy

The effect of the theory is that consumers preference in the market for a commodity varies. However, in the market, there is non-existence of a unique good. In political scenario, there might be existent of favored commodity. The difference is that its consumption varies. The argument is that uniform consumption of the product is not possible. In democratic political economy, crisis always arises. Consumers preference of who to vote in varies. This creates a cyclic situation. However, when the theory is applied, this situation is removable since there will exist a chosen candidate consumer choice.

Effects on the impossibility theorem in the political economy

The theorem states that with no dictatorship, each consumer has a rank on his preferences. In political economy, a voter chooses a candidate who seems is important to him Mankiw (2011). The preference is based on the individual who will fully recognize and act on their needs. Without force, a consumer therefore will prefer a candidate whose manifesto caters for qualities he needs most.

Impact of the theory of consumer choice on People not being rational in behavior economics

Consumer decision on their choice of a commodity in the market is considered rational. The theory affects the choice negatively and positively. An irrational consumer can be influenced to make a particular choice. This means that their rational choice for a particular commodity may be forced.

References

Gans, J. S., King, S. P., &Mankiw, N. G. (2011). Principles of microeconomics. South Melbourne, Vic: Cengage Learning

Mankiw, N. G. (2009). Principles of economics. Mason, OH: South-Western CengageLearning. Educational Series

Musgrave, F., & Barron's Educational Series, Inc. (2009).Barron's AP microeconomics/macroeconomics. Hauppauge, N.Y: Barron's