This consumer choice theory is a branch of microeconomics that relates what is chosen to consumer demand curves and consumption expenditures. It demonstrates how consumers maximize their desire for consumption as assessed by their preferences while minimizing their expenses by enhancing utility while adhering to a consumer budget limitation.
According to Gans (2011), an individual's consumption is determined by many abilities and motives. The rate of demand of a certain person or consumer is explained by the consumer's wealth, the price of the good, and the prices of similar goods. As per the law of demand which states that; the rate of consumption rises as the price of good reduces. If the price of a good rises the consumer will prefer to move to other alternatives which prices are relatively lower than the good. This will shift the demand curve lower.
Consequently, if the price of a good lowers the demand of that good will is high making the consumer to go for that good. This will leads the demand curve to shift high provided that there is compensation on the price rise. The purchasing power increases for most of the consumers. If on the other hand, the wealth of a consumer rises there will be a high demand of a commodity and this will make the demand curve to rise as well. If the wealth lowers, consumers will as well lowers their purchasing power of the commodity even if the price of the related good is subsidized. This will make the demand curve to lowers.
Prices of related goods also affect the demand curve either positively or negatively. Musgrave (2009), if the prices of related goods increase the consumer will not go for that commodity making the demand curve for that commodity to lowers. If the prices of the related commodity reduces the chances for a consumer to purchase that commodity is high and hence the demand curve will rise.
Impact of the theory of consumer choice on higher wages
The theory will have both positive and negative effects on higher wages. If the consumer increases the desire for the preferred commodity by increasing its utility, that means the budget will be high making the higher wages to be lower. If consumer reduces the desire for the preferred commodity, the higher wages will be affected positively because fewer prices will be used to purchase the commodity. If the price of the preferred commodity rises, consumers will spent much on the same good leading to the reduction of the higher wages because of the increase in the expenses.
On the other hand, reduction on the prices of the preferred commodity will make the consumers to spend less on their wages having low effects on the higher wages.
If the prices of the related commodities rise, consumers will avoid purchasing them and the higher wages will be affected least since the consumers will purchase a commodity with lower prices. Consequently if the prices of the related commodity lower consumers will spend less of their wages making the higher wages to be less affected.
Effects of theory of consumer choice on higher interests rates
Effects of consumer theory on higher interest rates can be both positive and negative. If the expenditure of consumption is high, higher interest rates will still be high. Because consumer will spend more on the preferred commodity making the interest rates to be high. On the other hand, if the expenditure of consumption is low higher interest rates will reduced, since consumers’ purchasing power is low.
If the prices of preferred commodity rises in the market, consumers will reduced its consumption lowering the higher interest rates, and the demand curves is lower on the preferred commodity due to low prices, consumer will increase the purchasing power raising the higher interest rates. Consumers Wealth also affects the higher interest rates. Increase in wealth will increase the purchasing power of consumers, maintaining the higher interest rates.
Reduction in consumers’ wealth will reduce the consumption of the preferred commodity making the market to lower the higher interest rates. Alternate products also affect the interest rates significantly. Increasing the cost of alternative product will chase away buyers leading to the reduction of interest rates, and if their prices lower, consumers will go for it making the market to increase the interest rates.
Effects of the theory of consumer choice on the role asymmetric information has in many economic transactions
The effects of the theory of consumer choice on the role of asymmetry information are that; if the commodity preferred by the consumer is on the high demand, it will increase the role that asymmetric information has in economic transaction, since the consumers will increase the purchase power of a well-known product if the product has low demand because the consumers has little information about the product. The role of the asymmetry information will increase.
Impact of the theory of consumer choice on the Condorcet Paradox and Arrow's Impossibility Theorem in the political economy
Effects on the Condorcet paradox
The effect is that, every consumer has his or her preferred commodity of which in the market there is no unique good. In the political economy, though there must be a preferred commodity it may not be consumed uniformly, it may led to a situation where by there is a conflict. For example, if there are three candidates to be voted in, and one is chosen to, arguments may arise in which the consumers want their preferences to win leading to a cyclic situation. If the theory of consumer choice is employed that means the cyclic situation will not exist since there will be a preferred candidate consumer choice
Effects on the impossibility theorem in the political economy
This theorem states that; every individual has rank of order of preferences, with no dictatorship. Mankiw (2011) argued that in the political economy consumers will choose the product or a person of their choice depending on how that product is of importance to them. They will go for a person whom they see he can satisfy their needs most and leave the alternative. For example if there are two contestants, they will prefer one who has the qualities of their choice, without being forced
Impact of the theory of consumer choice on People not being rational in behavior economics
Consumers in the market are always considered as rational when they are making choices. This theory may have both negative and positive impacts. Irrational people in behavior economic may be influence to choose a commodity which satisfies them. They may be forced to make rational decision of a given commodity.
References
Gans, J. S., King, S. P., &Mankiw, N. G. (2011). Principles of microeconomics. South Melbourne, Vic: Cengage Learning
Mankiw, N. G. (2009). Principles of economics. Mason, OH: South-Western CengageLearning. Educational Series
Musgrave, F., & Barron's Educational Series, Inc. (2009).Barron's AP microeconomics/macroeconomics. Hauppauge, N.Y: Barron's
