The Theory of Consumer Choice

Consumer choice theory’ is a hypothesis about why people buy things. Put simply, it says that you
choose to buy the things that give you the greatest satisfaction, while keeping within your budget. At
the heart of this theory are three assumptions about human nature.

1. Utility Maximization

The first assumption is that when you shop, you choose to buy things based on calculated decisions
about what will make you happiest. In economics language, this is known as utility maximization.

2. Non-satiation

The theory assumes that no matter how much you shop, you will never be completely satisfied. In
other words, you will always be happier consuming a little bit more. This is known as the principle of
non-satiation.

3. Decreasing Marginal Utility

Even though you always get more happiness from more consumption, the amount of pleasure you
get from each good decreases with the more you consume. So if you eat two ice creams rather than
one, you get more overall pleasure, but the second ice-cream won’t be as satisfying as the first. This
is known as decreasing marginal utility.

Consumer choice theory has influenced everything from government policy to corporate advertising
to academia.

But the theory has been criticized for not being the most accurate description of how people actually
make choices. A whole new branch of economics, called ‘behavioral economics’, has emerged
essentially to use findings from psychology to disprove the assumptions behind consumer choice
theory. This has also led others to argue that consumer choice theory is less about describing how
we do actually behave, and is more about describing how people should behave.

Advantages of Consumer Theory

Building a better understanding of individuals' tastes and incomes is important because it has a big
bearing on the demand curve, the relationship between the price of a good or service and the
quantity demanded for a given period of time, and the shape of the overall economy.

References:

1. https://www.ecnmy.org/learn/your-home/consumption/what-is-consumer-choice-theory/
2. https://www.investopedia.com/terms/c/consumer-theory.asp