[Commerce Class Notes] on Preferences of the Consumer Pdf for Exam

Consumer preference is a significant part of microeconomics. Customer preferences include the concepts of the budget line, utility, indifference map, and indifference curve which are very closely associated with customer satisfaction. In this article, we will have a precise discussion of the various concepts of the consumer preference theory. Common yet important terminologies will also be included in this. The article will further include an analysis of the consumer behavioural patterns and a study on customer taste and preference.

Consumer Preferences Economics

Understanding the behavioural patterns of consumers means understanding the factors guiding the consumer preference in marketing. The central idea goes around with the concept of utility which is defined by the serving range of a commodity in fulfilling the human needs. It refers to the satisfaction derived by a consumer from the using of a particular product or service.

There are two types of utility:

• Cardinal Utility Approach: This is also called Marginal Utility Analysis. This theory defines utility as something measurable in numerical terms. The Cardinal Utility Theory states that utility has to be measured in the unit called ‘utils’. Goods providing higher satisfaction to the customers will get assigned with higher utils than the ones that provide less amount of satisfaction to the customers.

• Ordinal Utility Approach: This is also called Indifference Curve Analysis. This theory states that utility derived from the consumption of a commodity cannot be measured in numerical terms. Various utility levels are described with the help of ‘ranks’ in this case. Goods providing higher satisfaction to the customers will get assigned with higher ranks than the ones that provide less amount of satisfaction to the customers.

Important Terminologies Associated with Consumer Preference Theory

• Marginal Utility: The additional satisfaction derived from the consumption of an additional unit of a good or service is called marginal utility. It is defined as the change brought in the total utility by the consumption of one more unit of a particular commodity.

• Total Utility: The total amount of psychological satisfaction derived from the consumption of a said amount of a particular commodity is called total utility. Hence, total utility is the total of all the marginal utilities derived from the consumption of every successive unit of a particular commodity.

Law of Diminishing Marginal Utility

Understanding consumer preference meaning has a deeper relationship with the understanding of the Law of Diminishing Marginal Utility. It says that with more and more consumption of a particular commodity, the satisfaction of the consumers gets less and less. With the consumption of successive units of a particular commodity, its marginal utility keeps decreasing. This means that the commodity’s total utility increases but at a decreasing rate.

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Indifference Curve 

Bundles of a product making a customer more satisfies are preferred more than other bundles. However, in cases when some bundles provide equal satisfaction to a customer, indifference grows within the customer for the bundles. This makes the consumer fail in preferring one commodity over another. The indifference curve is a graphical diagram representing the bundles that tend to cause indifference in a customer. It is to be remembered that an indifference curve is in all case sloping downwards and is convex to its origin. The higher satisfaction level is denoted by a higher indifference curve.

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Did You Know?

• Indifference map is a collection of several indifference curves.

• Two indifference curves can never intersect each other.

• Both ‘Marginal Utility’, as well as ‘Total Utility,’ are measured in utils.

• For utility measurement, the Cardinal Utility Theory is a quantitative method while the Ordinal Utility Theory is a qualitative method.