Consumer Choice Theory

Steven Reynolds

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

Consumer Choice Theory

OBJECTIVE: Understand how consumers allocate their income to maximize satisfaction

Finding the best combination of goods within budget.

Optimization

Limits spending based on income and prices.

Budget Constraint

Subjective rankings of different goods and services.

Preferences

Consumers aim to maximize their satisfaction (utility).

Rationality

Core Concepts

Less satisfaction from each additional unit.

Diminishing Utility

Satisfaction from consuming one more unit.

Marginal Utility

A numerical representation of preferences.

Utility

Utility Function

PₓX + PᵧY ≤ I: defines affordable consumption.

Line showing affordable combinations of goods.

Limits consumption based on income and prices.

Budget Constraint

One book costs 2 movies.

Opportunity cost

10 ($50/$5)

Maximum movies

5 ($50/$10)

Maximum books

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

$50 to spend

Budget Constraint Examples

Make informed spending decisions.

Personal Finance

Influence consumer behavior.

Public Policy

Set prices and target advertising.

Marketing

Real-World Applications

WATCH THE VIDEO AND EXPLAIN THE FOLLOWING TERMS

More is better

PERFECT SUBSTITUTES

MARGINAL RATE OF SUBSTITUTION

INDIFFERENCE CURVES

Preferences and Indifference Curves

WATCH THE VIDEO AND EXPLAIN THE FOLLOWING TERMS

WHAT DOES BUDGET CONSTRAINT REPRESENT?

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

Consumer Optimisation

SUBMIT TO CANVAS BY SUNDAY 23RD MARCH

TOTAL COLUMNS UP

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

TAKE NOTE OF YOUR PURCHASE OVER THE NEXT 5 DAYS

YOUR CONSUMER DIARY