Consumer preference is significant to Microeconomics. Ideas, for example, utility, budget line, indifference curve and indifference map sound complex, on the double, however, are straightforward as anyone might imagine. Let us comprehend Consumer Preference Theory to better understand customer conduct and how buyers settle on decisions.
To understand consumer behaviour, it is important to know what guides consumer preferences. Central to consumer preferences is the idea of utility. What is meant by ‘utility’?
Utility refers to the ability of a commodity to serve human wants. It is the amount of satisfaction a consumer gets from the consumption of a good or service. ‘Utility’ can be of two types:
- Cardinal utility: Cardinal Utility is the idea that economic welfare can be directly observable and be given a value.
- Ordinal utility: In ordinal utility, the consumer only ranks choices in terms of preference but we do not give exact numerical figures for utility.
It is argued this is more relevant in the real world. When deciding where to go for lunch, we may just decide I prefer an Italian restaurant to Chinese. We don’t calculate the exact levels of utility.
Recent developments in utility theory have tended to downplay the role of cardinal utility. The ability of consumers to make exact evaluations of utility is not clear.
Also, the idea of heuristics is that consumers don’t have the ability to make perfectly rational choices but make rough rules of thumbs and quick judgements.
It is imperative to understand the consumer preference theory to better assess and comprehend microeconomic trends. I truly feel that consumer preference theory is an integral part of micro economics.