Consumer Preferences and Microeconomics

Introduction

Consumer preference is defined as the subjective tastes of individual consumers. It is measured by the satisfaction they receive with those items after they've purchased them. This satisfaction is often referred to as utility.

 We all have different tastes and preferences when it comes to commodities and these preferences vary from person to person. We may prefer a commodity over another regardless of the price. For example a person may prefer oranges over apples regardless of their ability to buy it. These tastes and preferences play a crucial role in the choices we make, that is, consumer choice. Consumer choice refers to how we choose to use scarce resource to satisfy our wants.

This post aims to explain how microeconomics views and understands these consumer preferences. Therefore, we will be delving deeper into the microeconomic explanation of consumer choice and preferences.

Assumptions of consumer preferences

Under microeconomics, consumer preferences are examined with the help of a few basic assumption. Completeness is when consumers are assumed to have the ability to assess goods and determine which good is preferable to them and be able to rank the said goods. Reflexivity means that any bundles of goods are at least as good as itself. This means that each bundle of goods is either preferred or indifferent. Transitivity is when preferences are logically ordered, for example when one prefers oranges to apples and apples to bananas, you prefer oranges to bananas. Monotonic preferences is the assumption that the consumer prefers more to less goods, i.e. more is better. Non-satiation refers to the state that the consumer will always prefer more of a commodity. For instance, you might not want that fifth slice of pizza as much as you wanted the first four, but you will still have it if the restaurant was giving it to you for free.

Using these assumptions, we are able to understand consumer preferences in a more systematic and simple way.

Why is consumer choice relevant?

A producer produces goods with the sole purpose of consumption by the consumer. Therefore, the thorough understanding and knowledge of what the consumer likes/ prefers and how they chose to spend their money becomes crucial to maximising profit and efficient allocation of resources during the production process. For example, if consumers prefer chocolate milk that is produced by a producer over almond milk which is also produced by the same producer, then it makes sense for the producer to manufacture more of chocolate milk and less of almond milk to minimise wastage since consumers prefer to buy the former over the latter. However, the producer cannot do this until they have enough understanding and knowledge about consumer preferences.
Apart from this, it is important for producers to know the tastes/ preferences of their target consumer base. For instance, if a toy producing company needs to introduce a new product, they need to have the knowledge of what kids (their target consumers) like and dislike to be able to create a product that is popular and sells well. It is irrelevant and useless for producers to know/ focus on the preferences of consumers who are not going to finally consume their product.
Thus, a thorough understanding of consumer preferences of the target consumer base is required to design and produce goods and services that maximise profit and efficiency.

Conclusion

Consumer preferences and consumer choice are important concepts in microeconomics, based on which many theoretical models exist. Consumer preferences can be understood by gathering information and data through various sources and continuously act on it. It is important for a company to gather information and consistently improve their product and provide better services. Having knowledge about consumer behaviour be extremely helpful in dealing with trade-offs during production and can assist in better allocation and distribution of resources.