BACC 201 – Basic Microeconomics

Part III. Consumer Theory

Consumer theory – is the study of how people decide to spend their money
based on their individual preferences and budget constraints.

It is a branch or microeconomics which shows how individuals make choices subject

on how much income they have available to spend and the prices of goods and
services.

Understanding how consumers operate makes it easier for vendors to predict which
of their products will sell more and enables economists to get better grasp of the
invisible hand, the unseen forces that shape the economy.

Key Takeaways
✓ Consumer theory is the study of how people decide to spend their money based
on their money based on their individual preferences and budget constraints
✓ Building a better understanding of individuals’ tastes and income is important,
because these factors impact the shape of the overall economy
✓ Though useful, consumer theory is not flawless, as it is based on a number of
assumptions about human behavior

Understanding Consumer Theory

Utility - used to determine the worth or value of a good or service.

Types of Economic Utility

* possession
* form
* time
* place

Budget Constraints
-A budget constraint refers to all possible combinations of goods that
someone can afford within the amount of income available to you. It
exhibits all the combinations of two commodities that a customer can
manage to afford at the provided market prices and within the particular
earning degree.

Assumptions of a Budget Constraints (Budget Line)

• Two commodities – the economist assumes that the customers spend their
income to purchase only two products.
• Income of the customers – the income of the customer is limited, and it is
designated to buy only two products.
• Market price – the cost of each commodity is known to the customer.
• Expense is similar to income – it is assumed that the customer spends and
consumes the whole income.
Shift in Budget Constraints
-A budget constraint includes a consumer’s earnings and the rate of a
commodity.
▪ shift due to change in price
▪ Shift due to change in income

Maximization of Customer Choice

Consumer choice theory is a hypothesis about why people buy things.

Factors Influencing Consumer Behavior
✓ Psychological factors
✓ Social factors
✓ Cultural factors
✓ Personal factors
✓ Economic factors