Consumer theory is the theory of the consumers’ demand and choice. It deals with how and why consumers make a decision or make choice regarding the consumption quantity of a particular good or set of goods, at a given price and other circumstances. This premise of the consumer theory is based on the idea and assumption that the consumers’ choices can be inferred and utility. It is also based on the idea that consumers always want to maximize their utility or satisfaction and whatever they like from their choice can also be inferred.
In consumer theory, we study the money spending decision of people on various goods based on their taste and preference and they are constrained by the given budget. Knowing the taste and preferences, money-spending decisions and income of the people is very important in shaping the economy. This is because demand for goods or consumption creates the induced investment that leads to the further generation of income and employment. To understand the consumer theory in a better way it is necessary to understand the basic assumptions about the consumers’ behaviour. Following are the three basic assumptions about consumer behaviour.
- Utility Maximization: The consumer theory assumes that a consumer always wants to maximize his or her utility as per taste and preferences and given budget. Here the term utility refers to the satisfaction gained from the consumption of the commodity. Although it can not be measured directly classical economists have considered money spent for goods as the indirect measure of utility.
- Nonsatiation: The assumption of nonsatiation in consumer theory means the consumers will always get additional benefit or marginal utility when they consume an additional unit of the good. In other words, the consumer will not stick with a fixed quantity of goods but will always want to consume more.
- Decreasing marginal utility: One of the important assumptions of consumer theory is that the utility or satisfaction is gained with every additional unit if consumption decreases. In other words, the utility of consumption of the 1st unit will be greater than the utility of consumption of the 2nd unit.
Author: Alok Aditya Junior Research Fellow Institute for Social and Economic Change