Consumer Choice Theory

Consumer Choice Theory

Consumer Choice Theory helps understand individual purchasing decisions. It examines decisions based on preferences and budget.

Steven Reynolds

Core Concepts

Rationality

Preferences

Budget Constraint

Optimization

Consumers aim to maximize their satisfaction (utility).

Subjective rankings of different goods and services.

Limits spending based on income and prices.

Finding the best combination of goods within budget.

OBJECTIVE: Understand how consumers allocate their income to maximize satisfaction

Utility Function

Utility

A numerical representation of preferences.

Marginal Utility

Satisfaction from consuming one more unit.

Diminishing Utility

Less satisfaction from each additional unit.

Budget Constraint

Limits consumption based on income and prices.

Line showing affordable combinations of goods.

PₓX + PᵧY ≤ I: defines affordable consumption.

Budget Constraint Examples

$50 to spend

Maximum books

Books ($10) and movies ($5).

5 ($50/$10)

Maximum movies

Opportunity cost

10 ($50/$5)

One book costs 2 movies.

Real-World Applications

Marketing

Set prices and target advertising.

Public Policy

Influence consumer behavior.

Personal Finance

Make informed spending decisions.

Preferences and Indifference Curves

WATCH THE VIDEO AND EXPLAIN THE FOLLOWING TERMS

INDIFFERENCE CURVES

MARGINAL RATE OF SUBSTITUTION

PERFECT SUBSTITUTES

More is better

Consumer Optimisation

WATCH THE VIDEO AND EXPLAIN THE FOLLOWING TERMS

WHAT STOPS US FROM REACHING THE FURTHER INDIFFERENCE CURVE FROM THE ORIGIN?

WHAT DOES BUDGET CONSTRAINT REPRESENT?

YOUR CONSUMER DIARY

TAKE NOTE OF YOUR PURCHASE OVER THE NEXT 5 DAYS

PRODUCE A TABLE WITH THE FOLLOW: PRODUCT / PRICE PAID / PLANNED PURCHASE? / NEED OR WANT /

TOTAL COLUMNS UP

SUBMIT TO CANVAS BY SUNDAY 23RD MARCH