As a branch of microeconomics, the theory of consumer choice addresses preferences to demand curves and expenditures on consumption (Sigurdsson, 2013). It examines the manner in which consumers capitalize on their desires in relation to consumption measured preference of items to expenditure limitations via consumer budget constraint and exploiting utility subject.
Impact of the Theory of Consumer Choice on Demand Curves
Individual consumption is influenced by various motivations and abilities. First and foremost, it is important to note that demand curves for a product or service reflect the willingness of the consumer to purchase it. In addition, demand curves come about as a direct consequence of the theory of consumer choice. As the price of a given product increases, the demand curve falls or slopes downwards, implying a decrease in demand for the product. Conversely, as the price of certain product decreases, the demand curve rises; the consumption of the product increases indicating an increase in demand for the said product. The increase or decrease in consumption forms the underpinning of the Theory of Consumer Choice along with its principles. However, it is not always that a decrease in the price of items prompts a rise in consumption. There is a rare occurrence where consumers buy less of an item despite the fall in the price of that item. The bizarre property of consumption is known as Giffen goods.
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Impact of the Theory of Consumer Choice on Higher Wages
As people earn higher wages, their purchasing power increases hence they are motivated to consume more given that that their respective budgets allow for it. This concept has a direct effect on the relative price of the particular product. For every unit rise in an individual’s wage, there is a corresponding increase in consumption for every hour of leisure. Besides, disposable incomes result in higher returns for domestic economies. Consequently, demand curves rise. With the increase in wages also comes the tendency for people to spend more on products and buy more luxury goods; moreover, the demand curve rises and a greater equilibrium is achieved (Karle et al., 2015).
Effects of Theory of Consumer Choice on Higher Interests Rates
Higher interest rates trigger the budget constraint to become steeper and shift outwards. Due to rising interest rates, businesses are more likely to incur higher production costs. This cost is then imposed on the customer via retail pricing. Furthermore, with higher interest rates, consumers may incur more costs in relation to their consumption and living expenses. The overall effect of an increase in interest rates is that consumer spending and budget constraints fall due to a cut back on disposable income.
The Role Asymmetric Information has on Economic Transactions
The asymmetric information came about as a result of the efforts by economists to explain common phenomenon and equilibrium issues in the economics continuum. In brief, the asymmetric information looks to detect the information disproportions between sellers and buyers in a particular market. In 2001, three economists received the Nobel Prize following their prominent work on this matter. Joseph Stieglitz, Michael Spence, and George Akerlof combined their individual competencies to design the Asymmetric Information Theory (Baigent, 2015).
Akerlof suggested the wide information disparities existing between car sellers and buyers band proposed a theory that supported the notion that sellers have the disposition of selling products of mediocre quality. Spence asserted that employers do not know the value of employees and those employees are more or less an uncertain investment given the indeterminate nature of their abilities during hiring. Additionally, he realized further discrepancies between employees and employers where low-paying employment opportunities support persistent equilibrium, a phenomenon which has the detrimental effect of prohibiting age increases in particular r markets.
Stiglitz, on the other hand, attained most praise through his discussion of negative externalities along with their effects on the product pricing in the market. He provided the example of high health insurance premiums and a high-risk individual; the high premiums restrict purchase by the prospective buyer due to their price.
The Condorcet Paradox and Arrow’s Impossibility Theorem
The Condorcet paradox infers to preferences among a group of options as well as the variables and results of the particular group of choices. In the case of transitivity, one may place A against B, B against C and C against A with the expectation that option A will emerge triumphant over all the choices (Karle et al., 2015). In the absence of transitivity, however, a Condorcet Paradox is experienced. The Condorcet’s Paradox is comprised of both cycles and winners. The winner refers to the alternative that generates majority support when pitted against each of the other options. The cycle takes place when there is a breach of transitivity in the social preference arrangement.
The Impossibility Theorem, which was conceived by Kenneth Arrow, states that buyers have rational preferences rather than other options. The central aspect about Arrow’s Theorem is that it incorporates transitivity, unanimity, no dictators and the independence of irrelevant substitutes. The theory is described as a mathematical model that reveals that no system for integrating personal preferences into a group of social preferences exists under particular assumptions and conditions.
Irrational Behavior in Economics
The traditional economy theory supports the idea that irrational behavior does not exist and rational behavior leads to negatively inclined yet transitive and consistent demand curves.
The opposite is true where irrational behavior does exist. One type of irrational behavior insofar as economics is concerned is the argument surrounding Brexit. In the words of a professor of Behavioral Economics at the University of Chicago, the people who championed for Britain leaving the European Union were not thinking or acting to the tune of traditional economics (Baigent, 2015). It is proposed that the reason for such irrational behavior has everything to do with the absence of analytical view of all the associated costs and information pertaining to the consumer’s happiness.
In conclusion, although demand and supply curves are affected by various factors, irrational behaviors have their own detrimental effects on these curves. On the other hand, rational behavior is represented by informed buyers who analyze and make appropriate decisions related to their consumption in the scope of financial health best practices; as a result, the demand curve attains equilibrium. The ideal scenario is where consumer choices are based on best practices as opposed to brand loyalty. This way, the consumer is in a position to benefit from long-standing financial security.
References
Baigent, N. (2015). Introducing Intransitivities in Social Choice. Studies in Microeconomics , 3 (1), 69-74. http://dx.doi.org/10.1177/2321022215583386
Karle, H., Kirchsteiger, G., & Peitz, M. (2015). Loss Aversion and Consumption Choice: Theory and Experimental Evidence. American Economic Journal: Microeconomics , 7 (2), 101-120. http://dx.doi.org/10.1257/mic.20130104
Sigurdsson, V. (2013). Consumer behavior analysis and ascription of intentionality to the explanation of consumer choice. Marketing Theory , 13 (1), 133-135. http://dx.doi.org/10.1177/1470593112467272
