Consumer Choice

I. The final point of the economic activity is the need fulfillment or the consumption.

Consumer choice is a theory of microeconomics which shows the decisions and actions of a business offering goods and services in relation with the preferences and behavior of the consumer and, of course, the demand for that goods and services.

Consumer preference is actually an individual's desire to consume a specific good or service and is transformed into choices that take into account the available consumer's income for purchasing those goods or services.

The total amount of satisfaction achieved by a consumer after consuming a specific good or service is called, in economics, utility. Each and every element of reality which is able to satisfy ones need, no matter of the nature of the need that has to be satisfied or how the consumer gets to procure it, has an economic utility.

Another important factor to be taken into consideration is the demand.

The fundamental theorem of demand says that if the price for a good rises, the consumption of that good falls. As a consequence to this comes the substitution effect. This means that if price of a good rises, the consumer will try to substitute the good with another one which costs less than the previous.

On the other hand, if the amount of money possessed by the consumer rises, the demand increases also and the consumer will give up buying inferior goods and services by choosing alternatives which have higher prices and better quality.

This is called the income effect.

The indifference curve analyses is used to represent a consumer's indifference for a specific number of goods at a specific point on the curve. Throughtout the indifference curves, the consumer can actually rank his preferences by describing an infinity of such curves which have the role of ensuring different levels of satisfaction. The indifference curves cannot intersect.

The slope of indifference curve is the marginal rate of substitution, the rate at which an individual must give up good X in order to obtain one more unit of good Y and in the same time, by keeping their satisfaction constant. The marginal rate of substitution is the mathematical expression of the opportunity cost for one more unit of a certain good.

Alternatives Number of tickets Number of tables

A 1 50

B 2 25

C 3 15

D 4 10

E 5 8

We can see that, by progressively reducing the number of tables that the consumer is willing to give up in order to obtain one more ticket, we obtain the law of progressive reduction of the marginal rate of substitution.

By this, we have tried to answer the question "What does the consumer want?" in relation to what he can afford to do, so that finally, by the intersection of these two proportions (whish - possibility), we can see what the consumer will choose in order to reach the maximum of satisfaction or utility.

The substitution effect has as main cause a rise in price of a certain good which induces the consumer, who has the same income, to buy more of a relatively lower-priced good and less of the good that has its price increased.

The substitution effect is a negative one for the seller because a consumer's main purpose is to maintain his standard of living in face of increasing of prices by choosing to spend on a good with lower price rather than on higher-priced ones. Although the effect is beneficial to some, for example discount retailers, it is usually negative in nature because it causes a limit in choice. This theory applies also to services, not only to goods.

The substitution effect is closely related to the income effect for certain goods, because the effect of having prices and income changed, causes a change in consumers choice from luxury goods to inferior substitute goods and all the way around.

The income effect is a change in money income of the consumer that changes the quantity demanded for a certain good or service. The relation between income and quantity demanded is a positive one because as income increases, the demand for goods and services also increases, so the consumption will increase as well.

The graph below shows that when prices remain constant, as the income changes, the budget constraint curve shifts parallel.

If income increases, the budget constraint curve will shift to the right and when income decreases, the budget constraint curve will shift to the left.

The budget constraint describes the total amount of combinations of goods and services that the consumer can afford taking into consideration his current income.

The price effect implies a change in demand because of a change in price of a commodity, Ceteris Paribus.

Price effect =

It is also considered that price effect is the sum of the two effects mentioned before: the substitution effect and the income effect. Every change in price therefore can be decomposed into substitution effect and income effect.

* II. The consumer choice theory from the marketing theory point of view

Consumer choice is a branch of consumer behavior theory having as main purpose the analysis of how an individual consumer deals with making decisions.

Marketers have always shown a huge interest in consumer choices, simply because, in order to become an important element in society, marketing needed

to know very well what people desire and expect to see in order to make them spend their money on a specific product.

Soon after it became popular, the marketing concept was present in business schools and taught through topics like merchandising, retailing, personal selling. First thoughts about advertising appeared afterwards, when people started to focus on what can bring motivation to consumers. Getting as much information as possible about the consumer, who was considered the main instrument of the economy, became the aim of the marketing research.

Nowadays, even though topics in the consumer research area are various, there is still a tendency of better understanding of the choice the consumer makes between products, brands, spending versus saving, prices, quality, hierarchy of personal needs.

From a psychological point of view, researchers have found out that some advertisements