Consumer Theory: Customer Preference and Concept of Utility

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Consumer Theory
CHAPTER 4
Customer Preference and Concept of Utility
Customer’s Preference Factors
* Completeness and Rankability: Customers compare different products and make their ranking depending on their personal preference.
* More is better than less. Customers tend to prefer buying products that give them more products for a certain amount of money than those they get a little.
* Transitivity: customers are found to prefer goods and products consistent in terms of quality and availability.
* Variety: Some customers prefer to have more of one product they trust, while others prefer to have different types of feeling more satisfied.
The Concept of Utility
It is the satisfaction that the customer gets by using a product. The utility function is a mathematical relationship between a customer's well-being and actual consumption.
Comparing Consumption Outcome
The ranking can be done either through ordinal ranking or cardinal ranking.
Why not Cardinal? It is challenging to be more specific with the measurement of the preference of the client. The other factor that makes it impossible with cardinal ranking is that there is no real-world measure of how much more a customer likes a specific product than the other.
Indifferent Curve: In the ordinal ranking, the relative outcomes are of more concern. It can represent in a way that some products are better than others. An indifferent curve is a curve that brings out all the bundles of consumption that provides the same level of satisfaction to the customers.
Figure 1. customers indifference curve
Essential factors on the indifferent curve
THE CUSTOMER INCOME AND THE BUDGET CONSTRAINT
The customer's payment changes create a shift for the budget is a constraint with the intercept changes. Also, the price of a particular good affects the budget constraints through the slopes change.
In the budget constraint curve above, spending more on one item can significantly affect purchasing the other product. Whenever a client has to face high prices or low income, they might not afford the other products. The doubling of the price of lattes and burritos' price causes a reduction of the income by half. The graphs below give a perfect picture of the changes caused by the drop.
Effect of price or income changes on the budget constraints
Effect of price or income changes on the budget constraints
Graph (a) shows that the increase in lattes' price ended up affecting burritos' purchase. The client had to reduce the bundles of goods they buy to ensure the money is enough. Graph (b) also shows how the increase in the price of burritos has affected the budget. The customer has to make the hard decision of reducing the bundles of goods he purchases. Graph (c) can illustrate the constraints that come with lower income. The reduction of income affects the customer's budget, for he has to reduce the bundles of all goods that he purchases.
Non-standard Budget Constraints
The main non-standard budget constraints are the quantity discounts and the quantity limits.
Quality discounts
The scenario is whereby the customers secure lower discounted prices after purchasing the mi...