The analytical paper discusses theoretical background determining economic behavior and consumer buying choices. The irrationality of consumer economic behaviors and purchasing decisions makes companies consider feasible theories and concepts explaining the interdependencies and shifts of supply and demand. The coursework emphasizes the Theory of consumer choice and demand curves, as well as the concepts of asymmetric information, political economy, and behavior economics to determine the rationality in making economic decisions. The brief analysis of Condorcet Paradox and Arrow’s Impossibility Theorem help to construct the assignment scenario aiming to pursue feasible recommendations to the organization’s marketing department willing to have better understanding of the ways consumers make economic decisions. The analysis emphasizes the importance of applying economic and non-economic frameworks in learning and assessing consumer behaviors and the ways the latter impact the supply side on individual markets. Based on peer-reviewed sources, the paper provides complementary picture of how market forces shape individual consumer choices and buying decisions.
Theory of Consumer Choice and Frontiers of Microeconomics
Given that people’s economic behaviors and purchasing choices are mostly irrational, the paper provides the robust cause-effect analysis of due paradox. Based on the theory of consumer choice, the coursework analyzes the impacts of the concepts of asymmetric information, political economy, and behavior economics to show how consumers make economic decisions. As part of assignment scenario, feasible recommendations are provided to the organization’s marketing department to better understand how consumers make economic decisions. The analysis describes the ways the theory of consumer choice impacts demand curves, higher wages, and higher interest rates. It also emphasizes the role of asymmetric information in economic transactions. Finally, the analysis refers to the Condorcet Paradox and Arrow’s Impossibility Theorem in the political economy.
Frontiers of Microeconomics
Economics studies the decisions and choices people make and expands our understanding of consumer behavior. The economics of asymmetric information implies that some of us are better informed than others. Information we possess, therefore, determines the difference that affects the quality and rationality of our consumer choices and purchasing decisions. The concept of asymmetric information is equally applicable to any consumer domain we daily stick with, ranging from common-day purchases to exclusive luxuries. Further, the concept of political economy is about economic governance and its microeconomic impacts on the markets. Political economy deploys economic tools to understand the government functioning and serves as a needed qualifier to prevent market failures and safe governments from erroneous policies. Mostly, the potential improvements depend on the capacity of political institutions and the quality of their performance. Finally, the concept of behavioral economics provides us with important insights into crucial economic matters. Unlike the generalized conventional economic theory, the concept of behavioral economics robustly explores the phenomenon of human economic behavior and subsequent consumer choices (Bishop 2005).
Theory of Consumer Choice and Demand Curves
The theory of consumer choice explores the nature of consumer decision-making in terms of correlation between the goods-to-buy and their purchasing capacity. The demanded quantity decreases once the price of a good or service rises. The demand curve applies in consumer decision-making when consumers refuse to purchase more goods or services. The decision of consumers can be charted using. The demand curve assumes consumers’ facing trade-offs that much determine the final consumer choices. The consumer choice theory implies transitive consumer preferences depending on the linear budget constraints predetermining their purchasing capacity or affordability. Given a limited amount of resources, a buying choice has a preferred value. While the assumed value differs in each individual case, though, a consumer will make the firsthand buying choice for products or services that will work best for them (Hawkins et al. 1998).
Under the realms of microeconomics, the supply and demand fluctuations largely depend on the choices made by the consumers. At that, most consumers tend to spend more during their initial purchases. The demand for the product fulfills and rises when there is a critical amount of consumer choices in favor of a particular product or a service. The demand for a certain product or service drops when the critical amount of consumer decisions has been made and the target audience has been satisfied. On that instant, the demand curve dramatically shifts. After a company releases a new product, it is strategically important to satisfy the needs of target consumers and, therefore, ensure the stable maintenance of the demand side.
The demanded quantity of any good or service determines the cost consumers are ready to pay for it. At that, the price plays a crucial role in how markets operate. The horizontal curve determines market demand, while the calculation of the demanded quantity assumes the addition of individual quantities present in horizontal axis within individual demand curves. With the variation of price, total quantity demanded of a good as well as the market demand curve vary in response. These fluctuations enable corporate marketing departments to forecast how much goods or services consumers will purchase potentially. Consequently, the market determines the overall quantity demanded as a sum of the individual quantities demanded by each consumer. This way, consumer decisions designate the overall market demand curve by adding individual demand curves horizontally.
This is to show that the demand curve is a crystal reflection of consumer decisions and buying choices at the affordable price. Whenever the price goes down, consumers demand increases in quantitative terms, and vice versa. Hence, the demand curve designates the interdependence between the price for a particular good or a service and the target consumer base ready to purchase them. By its nature, the demand curve goes downwards due to the income effect, the diminishing marginal utility, and the substitution effect. With the rise of interest rates, stores generate wider supply of goods. At that, retail pricing increases the costs for the end consumers. This means that while interest rates rise, consumers are prone to pay more. On some stage, however, the demand will shrink due to insufficient disposable income, budget constraints, and subsequently lower consumer spending (Schiffman & Kanuk 2007).
The Asymmetric Information, the Condorcet Paradox, and The Arrow’s Impossibility Theorem
In due context, the Asymmetric information theory significantly impacts economic transactions and shifts on the demand side. The achievement of the equilibrium between the imbalances between the supply and demand in a particular market is possible when sellers are able to offer market quality on less-than-average cost. At that, much depends on persistent equilibrium of the wage rates on the particular markets.
The Condorcet Paradox designates the preferences between the variety of available choices as well as the variables and outcomes of consumer decisions. Given the transitivity exists, the end consumer is a sole winner as he/she has the vast variety of goods or services to choose from. However, a Condorcet Paradox excludes such transitivity; the concept embraces both winners and cycles. The Condorcet winner benefits from the winning alternative compared to other possible choices. In its turn, the Condorcet cycle assumes transitivity violations regarding social preferences (Howard & Sheth 1969).
The Kenneth Arrow’s Impossibility Theorem emphasizes rational preferences of consumers compared to any other available choices. This way, the Theorem saves consumers from irrelevant alternatives. This means that instead of mass consumption, the mathematical theory bets on individual consumer choices and preferences (Shugan 2006).
The paper analyzed theoretical approaches to the complex issue of rationality of consumer behavior and purchasing choices. As is seen, much depends on market forces companies should account for to make correct forecasts regarding supply-demand correlations and shifts on individual markets. The analyzed concepts, theories and theorems imply that consumers have individual preferences while their buying decisions much depend on their purchasing capacity and the affordability of a particular good or service.
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- Schiffman, L. & Kanuk, L. (2007). Consumer Behavior, 9th Ed, Prentice Hall.
- Shugan, S. (2006). Are Consumers Rational? Experimental Evidence? Marketing Science Vol. 25, No. 1, pp. 1-7.