Do all human beings behave rationally when deciding to purchase a product over the other?
Consumer behavior model follows this simple assumption that the consumers behave rationally while deciding to purchase a product over the other to maximize their satisfaction. It may not be right for every time, but it can explain many situations where demand for a product increases or decreases due to consumer behavior.
Can a layperson behave the same way as an economist does while choosing a product?
My answer would be, “It depends.”
When you ask this question from an economist, he will presume that consumers can have preferences for certain goods and services over the others which they exercise according to their budget constraints.
A psychologist may argue that many consumers don’t decide to go for a good or service by following economics principles as they may purchase many things impulsively. They can ignore even their budget constraints. That’s why many of us go under burdensome credit card loans, and there are thousands of websites on the internet which sell products to repair your debts. (It is possible you burn your credit card by paying to some easy money maker.)
Study of consumer behavior is a combination of theories in economics and psychology. It is relatively new but developing into a new discipline in the name of “Behavioral Economics”. It helps us resolving daily life consumer behavior riddles and explaining what we observe in our corner market. It also helps us in understanding fluctuations in demand for a product in a specific situation. It is widely used in managerial economics, microeconomics, and financial management.
This model discovers some essential facts. For example, how a consumer chooses a product from a group of products having same characteristics and prices? In such situations, we say that the consumer has decided to prefer product ‘A’ over the product ‘B’ which is a substitute for the product ‘A’.
With increase or decrease of prices, we can also observe how demand for the substitutes changes.
This also helps us to decide prices for the new products. How personal choices and budget constraints can affect the demand for a particular product?
It also helps us to decide which product needs more promotions and what groups of income are to be targeted?
How can you create economic efficiency in a competitive market?
How consumer behaves in uncertain situations?
The understanding of consumer behavior model is essential for private marketing and financial managers. But it is also crucial for the public managers to design, implement and evaluate public policies.
What kind of food support program shall be helpful to reduce poverty level?
What kind of program will help the people to have more intake than they do without the program?
What kind of subsidy is useful?
What are loopholes to allow the consumers to waste government subsidy on things which are not required?
What kind of support tickets shall be helpful to increase education level?
Without understanding implications of this model, public policies can be extremely idiosyncratic. I have heard at LKY School of Public policy Singapore that to be a good policy maker; you need to be a good economist.
You know resources are limited...
It is fundamental to know how a consumer prefers a product over the other in the same category and price range with his limited resources.
What are the factors which push him to go to one product or the other?
How these factors affect the demand for different goods and services, at the different time?
When is it profitable to increase supply and when to reduce it?
What products are sensitive to prices and what are not?
How income affects purchasing behavior of the consumers?
These fundamental questions can be answered with the help of consumer behavior model. The answers are essential not only in managerial economics, microeconomics but also in financial management.
The simplest way to understand consumer behavior model is given by Robert S. Pindyck and Daniel L. Rubinfeld in their famous text book “Microeconomics”. They have mentioned three steps which can help us to understand the concept.
Why consumers prefer one product over the other? What are the factors which help us to compare products of the same category with almost identical prices? When you remain indifferent to these factors and when you become oversensitive?
These questions help us to understand consumer preferences for a product over the other.
Robert S. Pindyck and Daniel L. Rubinfeld quote a basket of different items which may contain various things of same or different categories. It may include grocery and food items as well as the cost of your residence. It may also carry bills of day to day utilities. Such kind of imaginary basket helps us to analyze consumer preferences with the same type of parameters.
Your income level plays a significant role in your choice. The primary need of human beings is food. When we don’t have food how can we afford to visit Phu Quoc island in Vietnam (which is otherwise a priceless luxury)? Most of our choices remain within our budget constraints. This is why most of the promotions on television focus upon different income groups. When we place budget constraints and consumer preferences, side by side, we get a somewhat better picture of factors behind consumer behavior. However, the story becomes obvious when we go to the third step.
Consumer choice follows the rule of maximization of satisfaction. Every consumer tries to remain within his budgetary constraints while making a preference for maximum satisfaction. When we place consumer choice alongside consumer preferences and budget constraints we get a pretty good concept of consumer behavior model.
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