Consumer Choice
Up until now, demand has largely been treated as something we can observe and measure. Regression helped us estimate how quantity changes when prices change. But regression only tells us what consumers do. The next question is much deeper:
Why do consumers make those choices in the first place?
To answer that question, economists build a theory of consumer behavior.
Why do consumers make those choices in the first place?
To answer that question, economists build a theory of consumer behavior.
Every day, people make countless decisions about how to spend their limited income. Some choose expensive vacations over luxury cars. Others spend heavily on restaurants while cutting back on entertainment. Some save aggressively, while others spend most of what they earn.
Although these choices appear highly personal, economists believe there is an underlying logic behind them.
The central idea of consumer choice theory is surprisingly simple:
People try to get the greatest satisfaction possible from the resources available to them.
Consumers may have different goals, preferences, and lifestyles, but they all face the same fundamental challenge: they want more than they can afford.
Because resources are limited, every choice involves tradeoffs.
Although these choices appear highly personal, economists believe there is an underlying logic behind them.
The central idea of consumer choice theory is surprisingly simple:
People try to get the greatest satisfaction possible from the resources available to them.
Consumers may have different goals, preferences, and lifestyles, but they all face the same fundamental challenge: they want more than they can afford.
Because resources are limited, every choice involves tradeoffs.
The 3 Foundations of Consumer Behavior
The standard economic model of consumer behavior rests on three assumptions.
- Preferences: Consumers derive different amounts of satisfaction from different goods and services. Some people love travel. Others care more about technology, dining, fitness, or entertainment. These preferences determine what consumers value.
- Constraints: No matter how strong a person's desire for a product may be, limited income restricts how much they can purchase. Time, regulations, and other real-world limitations also constrain choices.
- Maximize satisfaction: Given their preferences and constraints, people seek the combination of goods and services that provides the greatest overall happiness or benefit.
Economists often summarize this idea as: People do the best they can with what they have