Modern markets have become more competitive since many firms are offering the same goods and services to customers. There are specific factors that consumers usually consider before making the decision to purchase products and services. As such, economists developed a theory to help businesses to understand how consumers make choices. This theory is usually referred to as the theory of consumer choice (Bordalo, Gennaioli, & Shleifer, 2013). The primary role of this theory is to explain how customers make decisions. This paper will discuss the impact of consumer choice on demand curves, higher wages, and higher interest rates. It will also analyze the role asymmetric information play during economic transactions and Arrow theory of impossibility in a political economy. Finally, this paper will discuss about people not being rational in behavior economics.
The Impact of Consumer Choice on Demand Curves, Higher Wages, and Higher Interest Rates
Demand Curves
In many cases, the choices that consumers make are driven by prices. In many cases, an increase in commodity prices causes a corresponding decrease of goods and services demanded (Bordalo, Gennaioli, & Shleifer, 2013). Graphical presentation of the amount demanded (x-axis) and the prices (y-axis) that the customers are willing to pay precisely reflect the concept of consumer choice as suggested by the theory. This relationship is shown in the graph below.
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Demand Curve
In order to come up with this chart, Economists usually estimate the price that customers are willing to pay for a particular amount of goods and services. A downward sloping curve is often used to indicate the demand for normal commodities. As such, the amount demanded (x-axis) will increase when the price (y-axis) drops. However, when prices (y-axis) go up, the quantity demanded (x-axis) goes down. The amount demanded will always change depending on demand shifts and movements along a set demand curve. Notably, shifts in demand occur in cases where an external factor has caused a demand increase or decrease while the movement up or down along the curve reflects changes in the price of a commodity.
Higher Wages
Income is a factor that influences how customers make choices. The effects of income on consumer choice are demonstrated through income-consumption curves (Bordalo, Gennaioli, & Shleifer, 2013). From the theory of consumer choice point of view, the quantity of the product demanded is influenced by the amount of income that the potential income earns. This relationship can be shown in the income-consumption curve below.
Income-consumption Curve
The chart above shows that the varying levels of wages demonstrated by the green line curving upwards determine the quantity of goods and services that a customer can purchase. The differences in quantities purchased are due to the change in purchasing power of the customers. Therefore, an increase in wages would mean that a customer would have more buying power while a decrease in wages would reduce the purchasing strength of a client.
Higher Interest Rates
Interest rates can either increase or decrease. On the other hand, this changes can influence the behavior of the customers. Studies have indicated that interest rates play a part in determining whether a customer will increase or decrease his or her spending. It also helps consumers to make a decision on whether they will increase their savings. However, consumer attitude is crucial in determining the overall effect that changes in interest rates will have on them (Mankiw, 2009). This is because customers are required to make decisions that suit their financial status depending on the changes in interest rates. Researchers have indicated that when the interest rates are high many customers usually prefer saving over spending. Notably, when the interest rates are high, customers often make profits from their savings. This also implies that they will have more purchasing power in the future.
The Role Asymmetric Information Play during Economic Transactions
Economists usually use the term information failure to refer to asymmetric information. Information failure often takes place when one party in the market has more information that the other involved party. This is usually apparent in cases where a seller has more information that a buyer or vice versa. In the financial market, for instance, a borrower understands b his or her financial status better that the way the lender knows him or her. As such, during such transactions, it is hard for a lending institution to ascertain if the borrower can default. A creditor can use past information to study the borrowers borrowing and paying trends. However, such information is not sufficient to understand the financial position of the borrower. In order to cover for the risks, the lender might decide to increase the interest rates. This is an indication that as long as asymmetric information continues to exist in the economies, financial institutions will continue to charge more interest rates to cater for risks (Mankiw, 2009).
Arrow Theory of Impossibility in a Political Economy
According to Arrows theory of impossibility, it is impossible to have an ideal formula that can be deployed in a voting structure which can demonstrate the criteria that voters used to select candidates. As such, it is difficult to come up with a way that would enable people to understand how people make their choices based on their preferences. According to Arrow, it is hard to have a precise order of preferences determined while conforming to the routine principles of open election protocols (Savedoff, 2004).
People Not Being Rational In Behavior Economics
In economics, some customers often behave in a manner that is not rational (Zafirovski, 2003). During the decision-making process, rational behavior is taken to be a choice that an individual would make that would end up benefiting him or her (Zafirovski, 2003). In the market, a customer may be provided with two products of the same quality but different prices. However, a client may end up purchasing a much expensive product since they have an emotional attachment to that particular product. Despite the fact that their choice was dependent on taste and preference, the financial bit of it is not beneficial to the customer.
Conclusion
Consumers cannot be influenced by their preferences alone. Other factors such as income, price, quality and the availability of a particular commodity affect the final decision that customers make. The consumer choice theory, therefore, ensures that all these factors are considered so that companies can explore the available resources to ensure customer satisfaction. On the other hand, commodity prices, high wage rates, and high-interest rates affect the choices that consumers make. This paper has also discussed the impact of asymmetric information on economies, the arrows impossibility theory and people being irrational in their economic behavior. Therefore, this article has provided a deeper insight into how consumers make choices and their actions on certain aspects.
References
Bordalo, P.; Gennaioli, N. & Shleifer, A. (2013). Salience and consumer choice. Journal of Political Economy , 121 (5), 803-843.
Mankiw, N. G. (2009). Principles of economics , (6 th Edition). South-Western Cengage Learning. Educational Series
Savedoff, W. D. (2004). Kenneth Arrow and the birth of health economics. Bulletin of the World Health Organization 82 (2): 139-140.
Zafirovski, M. (2003). Human rational behavior and economic rationality. Electronic Journal of Sociology , 7 (2), 1-34.
