Theory of Consumer Choice and Frontiers of Microeconmics

Theory of Consumer Choice and Frontiers
of Microeconomics
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Institution of affiliation
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Theory of consumer choice and frontiers of microeconomics
This is the branch of economics that relates inclinations of consumption expenses to the consumer demand curves and defines the idea of consumer alternatives. Budget constraint limits a shopper on what they can afford for purchase of products and services. People consume but their purchasing power is determined by many factors like their income, preferences and the living standards (Nicholson & Snyder, 2014). Therefore how much an individual earns will determine how they will spend their money. The theory of consumer choice impacts demand curves, wages and interest rates, and the irrationality of consumers.
Demand Curves
The quantity demanded for a service or a product is smaller at lower prices than at higher prices. However, luxury goods such as sports cars and high end jewelry do not bend to this principle. The higher the price goes, the higher the demand. These types of goods are known as goods of ostentation. Research shows that demand and price have an inverse relationship leading to the downward slope of the demand curve. The 3 common descriptions of why demand curves slope downwards are the law of diminishing marginal utility, the price and the substitution effect. The law of diminishing utility states that the more a product is sold out to the public the lesser the consumer feels the need for it thus they believe they need to pay less for it (Rios, McConnell & Brue 2013). For example, when Chanel begun selling their bags, the target market was the exclusive class, but with time the bags begun flooding the market and were no longer as pricey as they used to be. Today, the bags are available in all major outlets. The demand reduced as supply increased.
Higher wages
Consumer choice will rely on several factors one of them is their financial gain or higher wages. This suggests that as customers’ wages rise they have an increased spending power. Consumers will tend to buy things at a higher price as they consider them to be of better quality. Therefore, producers of the merchandise will have to enhance the amount of the production as a result of the rise in demand (Ehrenberg & Smith, 2016). When the consumer has an increased purchasing power, they are willing and able to pay for the products and services. For example, an employee earning $100 a week would find buying a car an expense. But when the income increases to $400, the same employee will find that a car is a necessity. This is because they can now afford to fuel and service it. This explains why people change homes when they begin to earn higher wages. Because they feel that their current neighborhood does not meet their standards of living.
Higher interest rates
When the interests go up, the price of a product or services goes up and when the price goes up, there is a decrease in demand. Consumers will make the choice to purchase a product that has lower rates. The interest of basic goods is lower than that of luxury goods. A consumer will prefer to buy food to eating out in a fancy restaurant. Though both scenarios refer to food, eating at a fancy restaurant i...