Consumer Preferences & Choice in Economics Video

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  • 2:48 Economic Importance of…
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Lesson Transcript
Instructor: Jennifer Lombardo
Why do consumers choose to purchase certain products or services? In this lesson, you will learn what consumer preference assumptions are and how they affect consumer choice in economics.

Consumer Preference

Eddie prefers to buy upscale, expensive Norvel brand clothing, while Jack loves to purchase low-cost clothing brand Nickel and Dime. Why do consumers prefer different products and services? In this lesson, you will learn the definition of consumer preferences and how they influence consumer choice.

Consumer preference is defined as a set of assumptions that focus on consumer choices that result in different alternatives such as happiness, satisfaction, or utility. The entire consumer preference process results in an optimal choice. Consumer preferences allow a consumer to rank different bundles of goods according to levels of utility, or the total satisfaction of consuming a good or service.

It is important to understand that consumer preferences are not dependent upon consumer income or prices. So a consumer's capacity to buy goods does not reflect a consumer's likes or dislikes. For example, Eddie can have a consumer preference for Rolex watches over Timex but only have the financial income to purchase a Timex.

Consumer Preference Assumptions

Let's further examine the idea of consumer preference through the three basic assumptions. The first assumption is called completeness, which is when the consumer does not have indifference between two goods. If faced with apples versus oranges, every consumer does have a preference for one good over the other. For example, Eddie has two alternative choices: steak or chicken. The assumption of completeness reflects the idea that Eddie should be able to compare his options, in this case steak and chicken. In other words, Eddie should be able to say whether he likes steak or chicken better.

The second assumption is called transitivity, which is based on defining a relationship between goods, such as if a consumer prefers good A to good B, and prefers good B to good C, then the consumer should prefer good A to good C. Let's use Eddie's food selections as another example. If Eddie prefers steak (good A) to chicken (good B), and prefers chicken (good B) to turkey (good C), then Eddie should prefer steak (good A) to turkey (good C).

The last consumer assumption is based on non-satiation, which states that more of a good is always better as long as it does not affect the consumer's ability to utilize all other goods. Eddie will be happier with 6 steaks and 2 chickens, than 4 steaks and 1 chicken. Eddie has no point of satiation or the ability to be satisfied. Some economists call this assumption consumer greed.

Economic Importance of Consumer Choice

Consumer preference is critical to economics because of the relationships between preferences and consumer demand curves. It is important to understand what Eddie and other consumers prefer to spend their income on which will help predict consumer demand. The purpose in understanding the consumer choice theory is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility or satisfaction in terms of their consumer budget limits.

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