What is the Consumer Theory?
The consumer theory is a theory in economics that tries to explain the relationship between a consumer's purchasing choices and income. The idea behind consumer theory is that consumers will try to purchase the products that will give them the highest levels of benefit or enjoyment for the amount of money that they can afford to spend. Restrained by a budget, they will buy less expensive products if prices increase and more expensive ones if prices decrease. Likewise, they will buy more expensive products if their income increases and less expensive products if their income decreases. Consumers make these choices in an effort to maximize the benefit they receive in return for the money they spend.
The theory assumes that consumers will spend only the money that they actually have and does not account for saving money. This is called the budget constraint. According to consumer theory, budget constraint will affect a consumer's spending decisions by limiting his or her choices. If a consumer can spend only the money he or she has, then any choices that cost more must be eliminated. For example, when purchasing a refrigerator with a budget of $800 US Dollars (USD), a consumer will choose the best model for that amount or less, but he or she will not choose a model with a cost of $900 USD.
Next, consumer theory looks at preferences. In general, the theory assumes that the consumer prefers a group of products packaged together, which is commonly called a bundle. A consumer often will prefer a bundle without regard to the brand, instead basing a purchase decision on something such as the number of products in the bundle or the size of the bundle. For example, a consumer might prefer a bundle with extra large bottles of brand A shampoo and conditioner over a bundle of smaller bottles of brand B shampoo and conditioner. If the bottles are the same size, however, then the consumer might have no preference of either brand, which is called indifference.
Consumer theory also discusses a factor called the substitution effect. This factor states that if the price of a product goes up, the consumer will have to choose to buy less or substitute a less expensive product in order to purchase the desired amount. In most cases, the consumer will substitute the less expensive product when faced with this choice. For instance, if the consumer usually buys a particular brand of coffee and the price goes up, he or she probably will switch to a less expensive brand of coffee. Alternatively, if prices then go down, the consumer can choose to buy more of the less expensive brand but usually will switch back to his or her preferred, more expensive brand.
The income effect is another factor in consumer theory. The income effect states that if a consumer's income increase, he or she will be able to purchase more of a desired product. The consumer also might choose to substitute a different product that previously was too expensive for his or her budget.
An example of the income effect would be if a woman usually purchases a certain brand of handbags because the brand is within her budget, but she really wants a more expensive brand of handbag. If her income increases, she usually will switch brands and purchase the desired, more expensive brand. Conversely, if the consumer's income decreases, she usually will switch to a less expensive brand.
@Comfyshoes- I know what you mean, but the price effect does make a difference. Whenever stores have those door buster sales in which the merchandise is sold almost at cost makes me want to go to the store even if I wasn’t planning on buying anything.
I love to go to the stores when they are offering deep discounts because I feel that I am getting more value for my money so I will buy more than usual. This is similar to the grocery store sales when they advertise those buy one get one free specials. I always stock up because the prices are so low and they usually advertise things that I would buy anyway.
@Subway11 - I agree with what you are saying, but I do think that there is a component of consumer behavior that adheres to the constraints theory. There are people that stick to their budget and don’t buy things that they can’t afford regardless of how hot the item may be.
It is just like the opening of a new hot restaurant that everyone is talking about. Just because everyone says the food at this restaurant is to die for does not make me willing to wait two months to get a reservation and spend two hundred dollars for dinner.
It is not practical for me because I have young children and would prefer to spend that money on an amusement park. So although I might be able to afford it, I think that it is too much money to spend for dinner and would choose to spend that same amount of money on other activities that would be more enjoyable for my family. It is just like I would rather go on a family cruise then get a piece of expensive jewelry for myself.
@Bhutan - I agree with you. This is why a lot of consumer advertising is geared toward opening a credit card. A lot of department stores will offer an additional discount on top of the current discount offered in order to get you to open an account.
I also think that consumer buyer behavior has to account for general buying trends that have nothing to do with income levels. For example, there may be a few hot toys that everyone is seeking to buy around the holidays and although they are quite expensive consumers will sacrifice and buy that item because of the perceived value that it has in the marketplace.
This is no different than the people that stood in line to get the latest reader tablet because it was a new concept that had just come out on the market. I sometimes think that increased demand for products like this is due to the herd mentality. If it is a product that everyone wants then people desire it and may even buy it just because of the buzz.
I just wanted to add that the consumer buying behavior does change when the consumer uses a credit card. Most department stores solicit customers in order to get them to open charge accounts with them because they know that statistically people tend to spend more when they use credit cards then when they are limited to the cash on hand as the constraints theory would suggest.
I think that consumer factors like credit card usage really make a difference in consumer spending patterns because since people are not immediately accountable for their purchase like they are when they purchase with cash they tend to often lose track of their expenses.
This type of spending is addictive which is why a lot of people carry credit card debt. I think I read somewhere that the average American family has $12,000 in credit card debt.
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