Introduction

Preferences of the consumer 

A significant part of the microeconomics, preferences of the consumer, means the study of behavioural patterns of the consumers, which play an essential role in demand factor and purchase of products. A business must study the market efficiently to make it a successful concern. Consumer preference is the subjective taste of customers gauged by their satisfaction. Utility is the key element to understanding the preferences of the consumer.

The utility is the satisfaction a consumer derives from the consumption of a good or service.

Consumer preference is a set of assumptions made to derive the consumer’s optimal choice. Consumer preferences are not dependent on the consumer’s ability to purchase goods or services. One can prefer a Sports Utility Vehicle over a Hatchback car but can only afford to buy a hatchback.

Consumers’ preferences are not dependent on the income of the consumer and products of goods/services. Simply put, the consumer’s ability to purchase goods does not affect their likes or dislikes.

The utility can be classified into two types:

• Cardinal Utility
• Ordinal Utility Approach

Cardinal Utility Approach

 This theory is a quantitative method of measuring utility. It is also known as Marginal Utility Analysis. Cardinal Utility approach states that utility can be measured in number, and the unit to measure utility is ‘utils’. It means goods that provide higher satisfaction levels to consumers have higher utils than those with low consumer satisfaction.

Ordinal Utility Approach

This theory is a qualitative method of utility measurement. It is also known as Indifference Curve Analysis. The Ordinal Utility approach states that satisfaction cannot be measured in number and cannot be quantified. Instead, it uses ranks to measure the utility levels of a consumer. It means goods with a higher satisfaction level are prioritised or given higher ranks than those with a love consumer satisfaction level.

Important Terminologies in Consumer Preference Theory

• Marginal Utility (MU): Marginal utility changes total utility brought by the consumption of an extra unit of commodity. In other words, the additional satisfaction is derived from consuming an additional unit of a good or service.
• Total Utility (TU): Total Utility is the total of all the marginal utilities obtained from every successive unit of commodity or service consumed. It is the total psychological satisfaction derived from consuming a given amount of commodity.

Law of Diminishing Marginal Utility 

Law of Diminishing Marginal Utility: The law of diminishing marginal utility is the most effective method of understanding consumer preference. The law states that by consuming additional commodity units, the satisfaction level derived from the successive unit goes down. Formally, the marginal utility of a commodity keeps decreasing with the consumption of different departments. On the contrary, the commodities Total Utility increases but at a diminishing rate.

 Relationship between Marginal Utility (MU) and Total Utility (TU) –

When MU decreases but stays positive, TU increases at a diminishing rate.

When MU is 0, TU achieves its maximum.

When MU is negative, TU starts declining.

 Indifference curve Analysis

Bundles of different products may give the same level of satisfaction to consumers. It becomes difficult for a consumer to prefer one bundle over another in such cases. A diagrammatic graph showing all bundles of an indifferent consumer is called indifference curve analysis. It simply states that two goods or services give the same level of satisfaction to the consumer.

Properties of Indifference Curve:

• An indifference curve is always sloping downwards.
• It is convex to its origin.
• A collection of indifference curves for various commodities is called an indifference map.
• Two indifference curves will never intersect each other.
• A higher indifference curve shows a higher level of satisfaction.

Factors affecting change in preferences of the consumer-

Advertising– It is a tool that directly impacts the taste and importance of consumer behaviour. Provoking and alluring ads attract consumers towards goods or services sometimes they don’t even need.

Cost: Change in the price of a good helps attract large customer flow towards it. Customers are price sensitive; an upward change in the price of commodities disheartens them from buying the products.

Alternatives: The price-sensitive consumer will always look for the best and cheapest options present in the market. The availability of substitutes alters the buying preferences of the consumers’ significantly.

Social Institutions: Since man is a social animal, they are bound by various social institutions like family, school, friends, television, religion etc.

Income level: A change in income of a consumer has a direct impact on its consumption pattern. It has a qualitative as well as the quantitative effect on consumer behaviour.

Conclusion

Consumer preference theory is a study of the behavioural patterns of the consumer. With scarce resources, the consumer meets its ends keeping its satisfaction level at the buying centre. It mixes various factors like advertising, income level, cost, social institutions and alternatives. Value, utility, risk, and convenience are critical elements of consumer preferences.