Microeconomics: Consumer Choice

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Table of Contents

Abstract
Introduction
Discussion
Change of Price
Income Effect
Availability of substitutes
Tastes and Preferences
Conclusion
Works Cited

Abstract

Consumer choice is an aspect of microeconomics, which focuses on the consumers decision-making process. Firms always try to attract consumers to their products so that they can gain a competitive advantage over their market rivals. However, this can only be possible if the firm can understand the factors, which influence consumers when they are making decisions. Pricing is one of the major factors that influence the decision-making process.

Consumers prefer products that are fairly priced. The income effect is another important factor that will determine the consumers behavioral patterns in the market. High-income earners have a different pattern in making their purchase decisions as compared to the low-income earners. Availability of substitutes in the market broadens the choices available for the consumers. Some consumers are heavily influenced by social factors, which define their tastes and preferences.

Introduction

Consumer choice is one of the most important aspects of microeconomics, which seeks to determine some of the factors that influence the buyers decisions in the market. According to Kreps (56), In microeconomics, the theory of consumer choice relates to the preferences of a consumer when making purchase decisions. The world is changing very fast and there are various factors within the microeconomic context that have changed in the past few decades.

According to Nicholson and Snyder (39), in the past, the market had few players who had absolute power because they did not have competitors. They were operating in an oligopolistic market environment. Consumers had no choice but to purchase the products presented by these firms. However, this has been changing over time. The current market in various industries is almost in a perfectly competitive mode where there are numerous buyers and sellers.

Competition is stiff, and every firm is struggling to attract consumers in order to remain operational. Consumers have the right knowledge about the products they want, and the options they have when they want to make their purchases. Consumers have become very demanding, always keen when making their purchase decisions. In this essay, the researcher seeks to determine the factors, which influence a consumers choice from a microeconomic perspective.

Discussion

According to Kreps (78), firms are currently keen on attracting consumers using all the possible tactics to gain a competitive advantage. However, some firms have failed in this attempt because of their inability to understand the factors that influence consumer choices. The best way of gaining a competitive edge in the market is to understand how consumers will make their purchase decisions whenever they go to the market. The following are the major factors that influence consumer choices.

Change of Price

According to Tisdell and Hartley (112), change in price has a significant impact on the consumers choice when they are making purchases in the market. This can be explained economically using the diagram below.

Figure 1: Effect of Pricing on Demand

Effect of Pricing on Demand

Source (Nicholson and Snyder 59)

As shown in the diagram above, a change in the price of an item in the market has a massive influence on the consumers choice. In the above diagram, the demand for product X was a unit when the price was a. However, this demand was reduced massively to b units when the price was changed to b.

It shows that when the price of a given product is increased, the demand for the product reduces. Price of a product is inversely proportional to its demand. When consumers are making their purchase decisions, one of the most important factors that they always look at is the price of the product. The price will define a number of factors when making purchases. The most important factor will be the ability of the customer to buy the product.

As Tisdell and Hartley (78) note, almost everyone wishes to own a private jet, but only a few people have the capacity to buy this product. This means that those who lack the capacity to buy the product will make a choice of not buying the product. The price will also determine the number of products one can buy from the market. Consumers prefer products whose prices are relatively lower because this offers them the capacity to buy more products or spend less.

Kreps (76) warns that it may be dangerous for a firm to use the pricing strategy to influence the consumers choice. This strategy is always very expensive, especially if the competitors decide to use the same strategy to defend or gain more market shares. Sometimes consumers may associate low prices with poor quality, especially when dealing with ostentatious goods. If this happens, the consumers will choose the competitors products, which are priced highly believing that they are of a higher quality.

The price of complementary products may also influence the consumers choice in the market. According to Tisdell and Hartley (68), consumers may be attracted to highly priced products because their complementary products are cheap. For instance, one would consider spending slightly more on a hybrid car that uses renewable energy because of its low operational cost. An individual may avoid buying a low-priced fuel guzzler because of the increasing cost of petrol.

One will reason that even with the fact that the car is low-priced one would not enjoy its benefits because of its high cost of operations. The consumers main motivation in such cases is not in the price of the product they are buying, but the price of the complementary products.

Income Effect

Consumer choice is also influenced by the income of a person. Low-income earners have a different approach to making decisions in the market from that of high-income earners. The level of income gives a person a given status within the society. People of a certain high class will want to be associated with that particular class. They will always try to make a distinction between their class and other lower classes.

This will have a massive influence on their decisions in the market. The rich will have a specific market they visit because it is associated with them. In such markets, quality is given emphasis, but this comes at an extra cost. However, their high income makes them very comfortable with such high prices. The fact that people from lower classes cannot afford to frequent such markets makes people of this class comfortable because they will be interacting with people from their class.

On the other hand, low-income earners are very keen when it comes to pricing of their products. They are always looking for quantity and not quality. They are always willing to compromise on the quality of the product whenever they are assured that the quantity will be increased. These two classes have distinctive qualities that make them very different when it comes to making choices. A firm must be able to understand the difference and come up with ways of meeting their needs in a unique way.

Availability of substitutes

Consumer choice is largely influenced by the availability of substitutes in the market. According to Nicholson and Snyder (67), some products have readily available substitutes, which will affect the decisions a consumer will make in the market. A consumer who wants a cold drink on a hot summer day may have PepsiCos Morning Dew in mind.

However, things may change when he sees an array of other cold drinks, some of which are considered good for ones health. In the end, such a consumer may end up taking cold milk instead of the Morning Dew. When presented with substitutes, which offer almost the same amount of value in addressing a given need, then consumers are always influenced by other factors. In the above example, the consumer went to the shop has a strong desire to take the Morning Dew.

However, he found out that there were other products offering the same value as Morning Dew. For this reason, he had to rebase his purchase decision in order to justify the product that he will finally pick. He ended up with milk instead, and the reason for choosing milk was based on the premise that it is healthier as compared to Morning Dew. In some cases, consumers will base their choices on the price of the product, quantity, or any other additional value they believe they shall get from the product.

Tastes and Preferences

According to Nicholson and Snyder (88), sometimes consumers may defy the laws of microeconomic and make purchase decisions that are not based on any of the premises discussed above. Some consumers are heavily influenced by their tastes and preferences when making their purchases.

Tastes and preferences may be defined by social factors such as culture, peer pressure, or personal issues. A good example may be jeans. This product is very popular among the youths around the globe. However, making a blanket assumption that every youth will like this dress may be misleading. A vendor may lower the price of his products hoping to attract a section of the market. However, if their tastes and preferences do not favor such products, then they will not make the choice of buying the products.

Conclusion

Consumer choice is an area of microeconomics that many firms have found very relevant when defining the consumer decision-making process in the market. As a firm struggles to develop strategies to attract the market, it is important to understand the factors, which influence consumers decision-making processes.

The price has been identified as a major factor because it does not only define the ability of a consumer to buy the product, but also the amount that one would be able to purchase. The income of consumers will define their choices because it may limit their purchasing power. Readily available substitutes may make a consumer consider buying a different product from the one originally planned. Finally, firms should understand that some consumers are influenced by their tastes and preferences as defined by social factors.

Works Cited

Kreps, David. Microeconomic Foundations. Princeton: Princeton University Press, 2013. Print.

Nicholson, Walter, and Christopher Snyder. Microeconomic Theory: Basic Principles and Extensions. Mason: South-Western/Cengage Learning, 2012. Print.

Tisdell, Clement, and Keith Hartley. Microeconomic Policy: A New Perspective. Cheltenham: Edward Elgar, 2008. Print.

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