Theory of Consumer behavior

Consumerism is the organized form of efforts from different individuals, groups, governments and various related organizations which helps to protect the consumer from unfair practices and to safeguard their rights.

The growth of consumerism has led to many organizations improving their services to the customer.

Consumer theory is the study of how people decide to spend their money based on their individual preferences and budget constraints. A branch of microeconomics, consumer theory shows how individuals make choices, subject to 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 a better grasp of the shape of the overall economy.

Determinants of Demand

The key determinants that affect the demand function are as follows:

Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change leads to a decrease in demand.

Income: A rise in consumer’s income will tend to increase the demand curve (shift the demand curve to the right). A fall will tend to decrease the demand for normal goods.

Number of Buyers: More the number of buyers, more will be the demand. Fewer buyers lead to a decrease in demand.

Complementary Goods (goods that can be used together): The prices of complementary goods and their demand are inversely related.

Substitute Goods (goods that can be used to replace each other): The price of substitutes and demand for the other good are directly related.

Dimensions of Consumer Behavior

Consumer behavior is multidimensional in nature and it is influenced by the following subjects:

• Sociology is the study of groups. When individuals form groups, their actions are sometimes relatively different from the actions of those individuals when they are operating individually.
• Psychology is a discipline that deals with the study of mind and behavior. It helps in understanding individuals and groups by establishing general principles and researching specific cases. Psychology plays a vital role in understanding how consumers behave while making a purchase.
• Cultural Anthropology is the study of human beings in society. It explores the development of central beliefs, values and customs that individuals inherit from their parents, which influence their purchasing patterns.
• Social Psychology is a combination of sociology and psychology. It explains how an individual operates in a group. Group dynamics play an important role in purchasing decisions. Opinions of peers, reference groups, their families and opinion leaders influence individuals in their behavior.

Understanding Consumer Theory

Individuals have the freedom to choose between different bundles of goods and services. Consumer theory seeks to predict their purchasing patterns by making the following three basic assumptions about human behavior:

Nonsatiation: People are seldom satisfied with one trip to the shops and always want to consume more.

Utility maximization: Individuals are said to make calculated decisions when shopping, purchasing products that bring them the greatest benefit, otherwise known as maximum utility in economic terms.

Decreasing marginal utility: Consumers lose satisfaction in a product the more they consume it.