Theory of consumer choice and frontiers of microeconomics PDF

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Theory of Consumer Choice and Frontiers of Microeconomics Corum-Orion S Jensen ECO/365 March 26, 2018 Muhammad Bashir

2 Theory of Consumer Choice and Frontiers of Microeconomics The theory of consumer choice is the study of how people arrive to their decisions of what to spend their hard-earned income on. These decisions can be made on a wide array of criteria, such as income levels, preferences, bills and other budget constraints, and availability. The amount of income an individual has will have the greatest effect on their spending habits and spending choices. Someone who is in a position that earns them over six figures on an annual basis is going to make much different choices about their spending than someone who only makes forty thousand dollars a year. Aside from general spending decisions, this gap in income will also force differences between the types of products they may deem as necessary as well as their acceptable quality. The individual with the higher income would not settle for a secondhand car with over eighty thousand miles, while the person with the lower income may have to save for a few months to afford the down payment on that same vehicle. In this piece, we will also discuss the impact the theory of consumer choice has on demand curves, higher wages, and higher interest rates. We will also cover the role that asymmetric information has in many economic transactions as well as the Condorcet Paradox and Arrow’s impossibility theorem in the political economy and why people are not rational in behavior economics. The Theory of Consumer Choice: Demand Curves, Higher Wages, and Higher Interest Rates The relation between the theory of consumer choice and demand curve slopes are fairly straightforward. A consumer’s choice will have an impact on a company or product’s demand curve. If they want to remain profitable they will need to appeal to and understand a consumer’s motivation and wants for their goods and services. To really understand the kind of effect that consumer choice has on a product’s demand curve we need to understand why a consumer would

3 choose a certain company’s product over their competitor’s. For an example, if two different companies had the same service with no major distinctions between the two then we would see that there is a similar demand curve for both companies’ services. If one company began to offer their service at a lower amount than their competitor’s then we would see that consumers without any sort of brand loyalty would switch to the more cost-effective service. Of course, there are few goods or services which command such brand loyalty that their customers are not easily alienated. This is why, in markets where demand is met by multiple entities, we need to focus on effective pricing strategies and quality goods and services. In addition to the impact and functionality of consumer choice as it relates to demand curves, there is also an effect on wages. If a consumer and an individual have higher wages and higher earnings their spending habits and choices are going to change. When someone has higher wages, items of a lower quality see a decrease in their demand, budget constraints are typically higher, and utility maximization take a different form. This is one representation that ties higher wages, consumer choice, and demand curves in a singular consequence. Whiles there are plenty of abstract things that tie into the theory of consumer choice. There are also more concrete and quantifiable things that can have an impact on a consumer’s choices and purchasing decisions. One of these factors would be interest rates. As interest rates increase, we see than the demand for a given market place tends to drop proportionally to the increase in rates. When interest rates are higher, consumers will pay more and more for the product or service. This will have an impact on consumer’s overall budget constraints and marginal utility. Thus, causing the consumers to desire less, and find more ways to do without the additional strain on their budgets. The concept and consequences of higher interest rates are not subject to just decreases in demand. We can also evaluate the consumers’ desire to save when

4 there are higher interest rates on banking and investment products. Higher interest yields tend to create an increase in demand for products like certificates of deposit, savings accounts, money market funds, and bonds. This is a situation where consumers are at an advantage due to higher interest rates.

Asymmetric Information as it pertains to Economic Transactions Too understand the role and impact of asymmetric information in economic transactions, we should first define the term. Asymmetric information is a term arriving from situations where one party in a transaction is equipped with superior knowledge of the good, service, or transaction as compared to the alternate party. The term is also liner to the term information failure, and for good reason. In a situation where asymmetric information is present, a party is going to have an unfair advantage in the transaction and potentially in the market as a whole. One of the most common exemplifications of asymmetric information is the sleazy used car salesman who knows preemptively that they are selling the consumer a “lemon” car. This example shows how the end consumer is damaged and wronged in transactions where asymmetric information is present.

Condorcet Paradox, Arrow’s Impossibility Theorem in Political Economy, and Irrational Behavior Condorcet’s paradox and Arrow’s impossibility theorem have a major role and influence on political economy. Condorcet’s paradox is the idea that social preferences expressed by the majority tend to be cyclical even if the voters themselves are not cyclical, and these cyclical choices can even be in direct conflict with each other. Arrow’s impossibility theorem posits that

5 given a selection of more than 3 distinct candidates, there exists no possible voting system that can convert ranked preferences into a majority wide ranking system. Each of these ideas is inherently useful in democratic processes. Though there is still an effect on political economy. Political economy is the study of the links between governmental policy and procedure as it pertains to production and regulation as well as the points of influence and the impact these policies have on social and economic systems. If we examine that Condorcet’s paradox and Arrow’s impossibility theorem have a consistent showing in democratic processes, how can we expect the majority’s will to have a positive or accurately justified influence of the economic landscape. It is sometimes necessary for the security and posterity of the economy for the government to remediate certain situations. Where the government is intended to be a tool for the good of a republic, how can we trust the outcome of a democratic process?...