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Preferences of Consumer
What is Consumer Preference?
Consumer preference is the subjective taste of individual consumers that is measured by the satisfaction they derive from an item after they buy it. It is often expressed through utility.
The value of the items consumers buy can be compared by measuring the utility of the items.
- Consumer preference is an important topic in economics. The use of consumer preference is applicable in other schools of thought too. For example, marketing departments keep an eye on consumer preference to check which product has higher demand in the market. They can also use it to check the trends in the markets and design a product according to consumer preferences in the market.
- Consumer preference is also a handy tool for measuring the satisfaction levels of consumers for products available in the market. This gives economists an idea of the standard to which an economy has reached. In other words, by checking consumer preferences, economists can predict the conditions of the economy.
- Consumer preferences also reveal the true purchasing power of consumers in a market. So, by checking consumer preferences, one can see whether the lifestyles and living standards of a society or community have changed. Usually, this is more relevant to luxury items or costly foreign products. When consumers prefer luxury items it shows that their purchasing power or income has increased. So, consumer preferences can also give a snapshot of the increase in income of consumers.
Monotonic preference is the preference of a bundle of goods over another so that the former contains more of one good and no less of the other good.
In economics, an agent’s preferences are termed weakly monotonic if given a bundle x, the agent prefers all the bundles of good y that have more of all goods. An agent’s preferences are termed strongly monotonic if given a bundle of goods x, the agent prefers another bundle y that has more of at least one good and no less of other goods of x.
In economics, a substitute or a substitutable good is a product that can be substituted for another same or similar good.
In simple words, a substitute is a good that can replace another without losing the utility of the goods.
Substitutes offer consumers to have wider preferences as they increase the availability of choices for the products in the marketplace. Substitutes offer alternatives to customers and are considered to be a factor in increasing competition which leads to a better quality of products.
Diminishing Rate of Substitution
The diminishing rate of substitution is related to the marginal rate of substitution (MRS). MRS states that a consumer will be interested in selecting a new product for consumption as long as the satisfaction derived from the new good is equal to the other good.
MRS is diminishing in nature meaning that the consumers would prefer to try new substitutes rather than increase the consumption of the same product for a longer period of time. This means that if the utility derived from one good is equal to the utility derived from another, consumers will prefer more of the new product more than the other one. The diminishing rate of substitution is applicable to almost all kinds of goods.
An indifference curve is a graphical representation of a curve that expresses a combination of two products that offer equal satisfaction and utility to the consumer.
In other words, the indifference curve is a graph on which the utility of two products remains the same on all points.
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Image 1: Graphical Representation of Indifference Curve
A graphical representation of an indifference curve is a line that is convex to the origin and downward sloping. The graph shows two goods that a consumer consumes. The graph above shows U indifference curve of the bundle of goods A and B. All points on the graph provide equal satisfaction to the consumer. In simpler words, although the number of bundles changes, the satisfaction derived from the sets of bundles remains the same on all parts of the curve.
An indifference map is a graphical representation of two or more indifference curves. The curves are all convex and downward sloping but their positions differ from one another.
In other words, in an indifference map, there are more than one indifference curves that lie one over the other. An indifference map may contain any number of indifference curves and the intention to draw such curves on a single graph is to show increased or decreased satisfaction levels for various two sets of bundles of the products depicted on the graph.
On an indifference map, the curves that are placed above show greater satisfaction levels derived from bundles of products than a curve that is placed below. The indifference curves on an indifference map retain all the properties of indifference curves individually. That is, the satisfaction level obtained from two bundles of products is equal at any point on a single curve.
However, the satisfaction levels derived from indifference curves that are placed one above the other are different from one another.
Indifference maps are important because they help to compare the satisfaction levels of product bundles by denoting satisfaction at various instances on the indifference curves. Moreover, as the positions of indifference curves denote the differences, the indifference curves are helpful in determining which product bundles offer maximum satisfaction. This helps the consumers realize their own preferences apart from the economists who can derive or connect the demand and supply of the products represented on the map.
Utility, in economics, refers to the satisfaction derived from a product by consuming it. Economists who believe in rational theories state that consumers will always strive to maximize their utility from the consumption of a good or service.
In other words, consumers always want to purchase those products that provide them maximum satisfaction.
Utility directly affects demand, hence also the prices of products. In general, consumers would be willing to spend more on items that they prefer. So, prices of items from which consumers can get more utility will grow automatically in the market.
Utility and consumer preferences are interlinked to one another too. In general, consumers prefer those items from which they can derive maximum utility. So, the more the utility of a product, the more its preferences. Put simply, consumer preference is skewed toward items that have more utility.
Consumer preferences can directly impact an economy too. When demand for one product rises and decreases for another, the economy changes from one stage to another. Depending on this change, economies must adapt themselves. Otherwise, a bottleneck may appear on the path of economic growth.
Q1. Why is consumer preference so important for marketers?
Ans. Consumer preference is important for marketers because it is directly linked with demand. The demand for consumer-preferred products is always high in the market. Therefore, marketers want to know consumer preferences so that they can create and adjust their products according to consumer preferences and demand.
Q2. What is the common link between indifference curves and indifference maps?
Ans. The link between indifference curves and indifference maps is that indifference maps are made of indifference curves.
Q3. What is the unit of utility?
Ans. The utility is measured with a unit called util.
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