Executive Summary
Key Question
The aim of this paper is to explain consumer behavior, in terms of how consumers allocate their limited incomes to buy various goods and services. The paper will focus on the factors that influence consumer behavior.
Reason
People have numerous wants, but their resources are limited. Consequently, they can not satisfy all their wants. Consumers have to decide on how to allocate the limited resources in order to satisfy the numerous wants. However, the right decision has to be made in order to avoid wastage of resources and to achieve the highest level of satisfaction.
Thus, it is important to investigate the factors that influence allocation of resources or consumer behavior. Additionally, understanding consumer behavior helps manufacturers to produce goods that meet the consumers’ expectations.
Approach
Consumer behavior will be analyzed by reviewing secondary literature. In particular, existing literature will be used to explain how consumer preference and budget constraint affect consumer choice. The secondary sources of information will include textbooks, journals and research reports on consumer behavior.
Discussion of Sources
A lot of written literature already exists on the factors that influence consumer behavior. The effect of consumer preference and budget constraint on consumer choice is extensively discussed in microeconomics textbooks and journals. Additionally, the relationship between the two concepts is well documented. However, literature on the exact definition of consumer behavior still lacks.
Key Conclusion
The research reveals that consumer behavior is, mainly, influenced by consumer preference and budget constraint. For a consumer to make the right choice, he must take into account his or her preferences and budget constraint.
Consumer Behavior
Consumer behavior is “the study of when, why, how and where people do or do not buy a product” (Arnold 34). Consumer behavior explains the purchase decision making process. Individuals have wants that are not only unlimited, but also differ in intensity. However, individuals have scarce resources or limited disposable income to spend on their wants.
Additionally, the available resources have competing alternative uses. Due to the scarcity of resources, individuals can not satisfy all their wants. Thus, the consumer has to make a choice on which wants to be satisfied first and those that can be satisfied later. The decision on what to buy is determined by the consumer’s preference.
Consumer Preference
Consumer preference describes the bundle of goods and services that a consumer prefers to purchase in the market (Krugman and Wells 56). Product preference arises because human beings, naturally, have different tastes and preferences (Champniss). Consumers’ preferences are linked to the experience of using the product in terms of the product’s functionality and benefits.
This means that the preferred product must satisfy the consumer’s demands such as personality and emotions (House, Gao and Spreen 450-464). Thus, consumer preference is determined by the level of satisfaction or utility derived from consuming the good or service. Utility refers to the ability of a product to satisfy the wants of the consumer.
In economics, the consumer is assumed to be a rational being. Thus, the consumer will aim at maximizing utility or satisfaction by spending his or her limited disposal income. The marginal utility derived from the use of a particular product diminishes as more of that product is consumed. Marginal utility refers to the additional utility obtained by consuming an extra unity of a product. However, the marginal utility of money is constant.
Apart from utility, consumer preference is also influenced by the consumer’s budget (Arnold 47). For example, when a person is purchasing an automobile, he or she must first decide on the preferred brand or model. This decision is often based on the performance or attributes of the available automobile models. However, the various types or models of automobile have different prices.
Besides, the consumer has limited cash to spend on the automobile. Thus, the consumer has to match his preference with his or her budget (Perner). In this context, the consumer may decide to purchase an automobile model that is associated with less satisfaction if the ideal model costs more than the consumer can afford. This is based on the fact that the consumer can not spend more than he or she has in terms of disposable income. Hence, consumers satisfy their wants or maximize utility subject to a budget constraint.
Budget Constraint
A budget constraint refers to the bundle of goods and services that can be purchased at the prevailing prices with the available disposable income (Krugman and Wells 56). The consumer normally chooses a combination of goods and services that he can purchase with the available income in order to achieve the highest level of satisfaction or utility.
Budget constraint depends on the consumer’s income. A consumer with low disposable income will have a highly constrained budget. This means that the consumer’s budget will allow him to purchase only a few goods and services. A consumer with a high disposable income, on the other hand, will have a less constrained budget. This implies that the consumer’s budget will enable him to purchase a relatively large number of goods.
Budgets are influenced by the prices of goods and services (Kim 203-205). According to the law of demand, the consumer will buy more of a product as the price of that product reduces and vice versa. Thus, in order to remain at the same level of satisfaction, a consumer facing a given budget constraint will consume less of a product whose price has increased (Kim 203-205).
Additionally, the consumer will increase the consumption of the product whose price has reduced. The consumer’s budget also determines the type of goods and services he can purchase. For example, the type of residence demanded by a university student depends on his disposable income.
A student with a lot of financial resources can choose to stay in a rented apartment. Assuming that a rented apartment is more comfortable than any other residential alternative, the student will be able to derive the highest level of utility since his budget is not financially constrained. A student with little financial resources can choose to stay in students’ hostels at the university. In this case, the student’s decision is informed by the fact that the financial constrain on his budget can not allow him to rent a better residence.
Finally, a student with no income to spend on accommodation can decide to stay at home and commute to the university on a daily basis. Thus, budget constraint influences the consumer’s product preference or the type of a product that the consumer can purchase. The influence of budget constraint is reflected in consumers’ choice.
Consumer Choice
Consumer choice refers to the ultimate decision on what to buy. It takes into account the consumer’s preferences and budget constraint (Krugman and Wells 65). As stated earlier, the consumer has unlimited wants and limited resources. Consequently, the consumer has to make a trade-off in his purchase decisions.
In order to make the right trade-off, the consumer must combine his budget constraint and his preference (Parkinson and Goodall 236-244). In this context, the budget constraint represents what the consumer can afford while the preferences represent what the consumer would like to purchase or consume (Parkinson and Goodall 236-244). The trade-off involves consuming more units of one good and less units of another good in order to maintain the same level of satisfaction or utility.
The optimal choice of goods and services is one that enables the consumer to derive the highest level of utility. At the optimum position (choice), the marginal rate of substitution (MRS) is equivalent to the relative prices of the goods and services in the market. MRS refers to the rate at which an individual is willing to trade-off a given set of goods and services.
Consumer choice is determined by the consumer’s level of income. The financial constrain on the budget will reduce if the consumer’s income rises and vice versa (Arnold 67). Thus, consumers with a high income can choose from a wider variety of goods and services than consumers with low income. Additionally, the consumer with a higher income can purchase more goods and services than the consumer with low income (Arnold 58).
Consumer choice is also determined by the product prices since price changes affect the budget constraint (HKTDC). Price changes affect consumer’s choices in two ways namely, the substitution effect and income effect.
Substitution effect occurs when the consumer buys more of cheap goods and less of expensive goods. In a nutshell, the expensive goods are substituted with the cheap goods (Krugman and Wells 78). Income effect occurs when the price change affects the total amount of goods that can be purchased with the available disposable income.
For example, a rise in tuition fee by 2% will affect a student’s budget and expenditure choices. The rise in tuition fee means that the student will have less money to spend on other items such as clothes. Thus, in order to purchase clothes and pay the new tuition fee, the student has to reorganize his budget. The reorganization will involve making a trade-off between the tuition fee and the clothes. The student may reduce his expenditure on clothes in order to allocate more money for the new tuition fee.
Conclusion
The purpose of this paper was to analyze consumer behavior by investigating why people consider particular purchases and the factors that influence consumer’s purchase decisions. As discussed earlier, consumer behavior refers to the process of making purchase decisions (Krugman and Wells 45).
The purchase decisions are influenced by consumer preference and budget constraint. Consumer preference refers to the goods or services that a consumer would like to purchase. Budget constraint, on the other hand, refers to the amount of goods and services that the consumer can afford. Thus, the consumer’s choice must take into account the preference and budget constraint (House, Gao and Spreen 450-464). This involves making a trade-off between the goods to be bought with the limited income.
Works Cited
Arnold, Roger. Microeconomics. New York: McGraw-Hill, 2008. Print.
Champniss, Guy. How can we Change Consumer Behavior to Benefit the Environment? Guardian Sustainable Business, 3 Nov. 2011. Web.
HKTDC. Changes in Consumer Behavior in Traditional Markets and Implications for Hong Kong Exporters. HKTDC, 12 Sept. 2009. Web.
House, Lisa, Zhifery Gao and Thomas Spreen. “Consumer Preference for Mandrins: Implications for Sensory Analysis.” Agribusiness 27.4 (2011): 450-464. Print.
Kim, Youn. “Alternative Specifications of Consumer Intertemporal Budget Constraint and Measures of Wealth and Savings.” Applied Economics 7.3 (2000): 203-205. Print.
Krugman, Paul and Robin Wells. Microeconomics. New York: McGraw-Hill, 2010. Print.
Parkinson, Bonny and Stephen Goodall. “Considering Consumer Choices in the Economic Evaluations of Mandatory Health Programs.” Health Policy 101.3 (2011): 236-244. Print.
Perner, Lars. Consumer Behavior: The Psychology of Marketing. Encyclopedia of Psychology, 1 Jan. 2012. Web.