CONSUMER CHOICE

Used and explained concepts:

y y y y y I. Consumer Choice Theory Consumer Preference Utility Theorem of Demand The Indifference Curve The Substitution Effect The Income Effect Budget Constraints The price effect II. Consumer Choice Theory from the Marketing Theory Point of View The Marketing Concept Brand Effect Brand Recognition Brand management III. Monopoly and Consumer Choice Monopoly Advantages Disadvantages Sellers Market Price Setter IV. Perfect Competition and Consumer Choice Perfect Competitive Market Total Revenue in Perfect Competitive Market Maximum Profit in Perfect Competitive Market V. Conclusion

I. The final point of the economic activity is the need fulfillment or the consumption. Consumer choice is a theory of microeconomics which shows the decisions and actions of a business offering goods and services in relation with the preferences and behavior of the consumer and, of course, the demand for that goods and services. Consumer preference is actually an individuals desire to consume a specific good or service and is transformed into choices that take into account the available consumers income for purchasing those goods or services. The total amount of satisfaction achieved by a consumer after consuming a specific good or service is called, in economics, utility. Each and every element of reality which is able to satisfy ones need, no matter of the nature of the need that has to be satisfied or how the consumer gets to procure it, has an economic utility. Another important factor to be taken into consideration is the demand. The fundamental theorem of demand says that if the price for a good rises, the consumption of that good falls. As a consequence to this comes the substitution effect. This means that if price of a good rises, the consumer will try to substitute the good with another one which costs less than the previous. On the other hand, if the amount of money possessed by the consumer rises, the demand increases also and the consumer will give up buying inferior goods and services by choosing alternatives which have higher prices and better quality. This is callea the income effect. The indifference curve analyses is used to represent a consumers indifference for a specific number of goods at a specific point on the curve. Throughtout the indifference curves, the consumer can actually rank his preferences by describing an infinity of such curves which have the role of ensuring different levels of satisfaction. The indifference curves cannot intersect.

The slope of indifference curve is the marginal rate of substitution, the rate at which an individual must give up good X in order to obtain one more unit of good Y and in the same time, by keeping their satisfaction constant. The marginal rate of substitution is the mathematical expression of the opportunity cost for one more unit of a certain good.

Alternatives A B C D E

Number of tickets 1 2 3 4 5

Number of tables 50 25 15 10 8

We can see that, by progressively reducing the number of tables that the consumer is willing to give up in order to obtain one more ticket, we obtain the law of progressive reduction of the marginal rate of substitution. By this, we have tried to answer the question What does the consumer want? in relation to what he can afford to do, so that finally, by the intersection of these two proportions (whish possibility), we can see what the consumer will choose in order to reach the maximum of satisfaction or utility. The substitution effect has as main cause a rise in price of a certain good which induces the consumer, who has the same income, to buy more of a relatively lower-priced good and less of the good that has its price increased. The substitution effect is a negative one for the seller because a consumers main purpose is to maintain his standard of living in face of increasing of prices by choosing to spend on a good with lower price rather than on higher-priced ones. Although the effect is beneficial to some, for example discount retailers, it is usually negative in nature because it causes a limit in choice. This theory applies also to services, not only to goods.

The substitution effect is closely related to the income effect for certain goods, because the effect of having prices and income changed, causes a change in consumers choice from luxury goods to inferior substitute goods and all the way around. The income effect is a change in money income of the consumer that changes the quantity demanded for a certain good or service. The relation between income and quantity demanded is a positive one because as income increases, the demand for goods and services also increases, so the consumption will increase as well. The graph below shows that when prices remain constant, as the income changes, the budget constraint curve shifts parallel. If income increases, the budget constraint curve will shift to the right and when income decreases, the budget constraint curve will shift to the left.

The budget constraint describes the total amount of combinations of goods and services that the consumer can afford taking into consideration his current income.

The price effect implies a change in demand because of a change in price of a commodity, Ceteris Paribus. Price effect =
           

It is also considered that price effect is the sum of the two effects mentioned before: the substitution effect and the income effect. Every change in price therefore can be decomposed into substitution effect and income effect.

y II. The consumer choice theory from the marketing theory point of view

Consumer choice is a branch of consumer behavior theory having as main purpose the analysis of how an individual consumer deals with making decisions. Marketers have always shown a huge interest in consumer choices, simply because, in order to become an important element in society, marketing needed to know very well what people desire and expect to see in order to make them spend their money on a specific product. Soon after it became popular, the marketing concept was present in business schools and taught through topics like merchandising, retailing, personal selling. First thoughts about advertising appeared afterwards, when people started to focus on what can bring motivation to consumers. Getting as much information as possible about the consumer, who was considered the main instrument of the economy, became the aim of the marketing research. Nowadays, even though topics in the consumer research area are various, there is still a tendency of better understanding of the choice the consumer

makes between products, brands, spending versus saving, prices, quality, hierarchy of personal needs. From a psychological point of view, researchers have found out that some advertisements can influence consumers, in a subconscious way, to associate different products with certain feelings caused by the looks of the products, the taste or the smell of them and this can affect the decision of the consumer when buying the product. By simply answering the question Have you ever bought something because it made you feel better? with a yes, it means that you experienced at least once the phenomenom caused by the manipulation of the marketing: I dont know why, but I like it!. Studies have shown that even the most rational consumers who use discernment in making decisions, often make irrational choices by buying products which dont necessarily satisfy their needs, but their emotions towards having them stirred by the way that the brand is advertised. Although consumer choice is considered to be a conscious series of actions, it may sound disappointing for us, the consumers, but in most of the cases, we are spending a large amount of our income on products that attract us emotionally because of their features given throughout advertising. This is called the brand effect, meaning that the product receives an additional accessory to its commercial value, which consists in explicit logo, fonts, themes, symbols, sound that must attract the client or the customer and must create a brand recognition towards them. Brand management deals with the strategy of giving birth to the brand and also trying to maintain it on the marketplace. Conclusively, the marketings most important goal to be achieved from the consumers choice perspective is to recreate the advertised products by showing a breath-taking image of them in order to give the customers the idea that they found exactly what they were looking for, this, by relying on their possible non conscious process of making decisions.

y III. Monopoly and consumer choice

We can describe monopoly as a complete control of a single producer/supplier over the market, or as the opposite concept of perfect competition. The main characteristic of a monopolistic industry is the lack of consumer choice where the only thing that a consumer is able to do is either not to buy, to buy a substitute of that product, or to agree to the price offered by the monopoly. Because of having the choices restricted, demand is frequently inelastic and we deal with a sellers market, which means that the goods available for sale are less than the people to buy them, so high prices result from this, having the consumer surplus reduced.

Monopolies are also price-setters, meaning that they have the ability of setting the desired price for the whole market. Although monopolies are usually considered to have disadvantages, in some circumstances, they also provide advantages for customers and from a social viewpoint.

These advantages are: 1) Research and Development: Because of their ability of gaining extraordinary amounts of money, monopolies can invest their profit in making successful research in order to make improvements in different domains. 2) International Competitiveness: Although a monopoly dominates its country of origin, it can face competition in foreign markets. 3) Monopolies Successful Firms: Towards firms, reaching monopoly is considered to be a sign of success, rather than a sign of economic failure and, by possessing efficiency and dynamism, a firm might become a monopoly. 4) No risk of over production The disadvantages are: 1) Exploitation of customers by giving them almost no choice but to buy their products 2) Absence of competition which leads to inefficiency 3) Extremely increased prices of products 4) Exploitation of labor, for example when the marginal cost is lower than the price

y IV. Perfect competition and consumer choice

In a perfect competitive market, no specific producer/supplier has the market power in order to set the price or to dominate the market. A perfect competitive market has to accomplish the following necessary criteria: - The presence of many firms - All the firms in the market offer the same type of products

- Firms are price takers, meaning that they dont have enough power to influence the price of a specific item - The market share of the firms remains small - The right of entry and exit is a characteristic of the industry - Perfect information of the customers and producers: Information such as price and quality regarding a product has to be well-known - Infinite buyers and sellers: Unlike in monopoly where there were less products and more buyers, meaning the demand is bigger than supply, in perfect competitive markets we deal with infinite consumers and infinite producers In a perfect competitive market, sellers must apply the same market price because otherwise, if they set a bigger price than the one existing on the market, no one will be willing to buy their products. These means that the revenue will be simply calculated as the quantity produced multiplied by the market price. Sellers can sell as much as they actually produce, using the existing price on the market, so the total revenue will be calculated as P (price) x Q (quantity sold) . The graph below shows the maximum profit in a perfect competition market which represents the excess of total revenue over total cost.

V. In conclusion, consumers must be able to make the right decisions, since they have a limited income and numerous choices by combining the budget constraints or what they can actually afford with their preferences or what they desire to consume. The project shows how the concept of consumer choice can be represented throughout many different economic aspects, by putting the individual willing to consume what the market offers in the first place.

Bibliography: http://en.wikipedia.org/wiki/Consumer_choice http://www.strategy-business.com/article/10314c?gko=23ebd http://www.zahablog.com/?page_id=246 http://www.peoi.org/Courses/Coursesen/mic/fram4.html http://www.basiceconomics.info/theory-of-consumer-choice.php http://economicsconcepts.com/perfect_competition.htm http://www.investopedia.com Book: Emotions, advertising and consumer choice by Flemming Hansen and Sverre Riis Christensen; Copenhagen Business School Press DK 2007

Members of the group: Mihaela Baltos Assoum Bassam Alexandru Angelescu Bogdan Banica Michel Khalil Sasha Belinski Group 111