Consumer preferences and Microeconomics.

As we all know, Microeconomics studies the decisions made by individuals and firms to allocate resources of production, exchange, and consumption and in addition to this Microeconomics helps us to formulate mathematical models based on samples of behavior of the consumers or firms and test the models against real-world observations.

Now, after reading all this, a few among you might be wondering what is the relationship between consumer preferences and Microeconomics. Well, lets find out together.

To begin with, we will try and answer two basic questions

Who are consumers and what is meant by consumer preferences ?

To begin with, Consumers are people who buy certain goods for their personal consumption and not for any other commercial purpose, and consumer preferences are nothing but the choices made by consumers while purchasing a good or a service, and these decisions or choices are majorly dependent on the satisfaction that a consumer receives from these goods or services.Consumer preferences are not affected by factors like an increase in the income level or a change in the price level, for example ; consider a case where a man dreams of buying a Rolls Royce but only has the financial ability to buy a Maruti car, but his financial limitations does not mean that he will prefer this Maruti car over a Rolls Royce and as mentioned above, these preferences are measured on the basis of utility, which is nothing but the level of satisfaction attained by the consumption of a good or a service.

Why is it important to study consumer preferences ?

Consumer preferences are mainly dependent upon the personal tastes of people and hence it is impossible to study it within the realms of economics, but still we are deeply inclined towards analyzing these choices as it helps in understanding the needs and wants of the people and also helps us in determining the quantity of the goods that must be produced to satisfy the consumers and which good would yield the producer greater profits.

A confused customer trying to choose between two brands

Two prominent ways of analyzing consumer preferences.

1. Cardinal utility approach/ Marginal utility analysis

This approach put forwards that utility can be measured quantitatively, and hence goods that yield a higher level of satisfaction is assigned a higher ‘util’ ( the unit with which utility is measured is known as utils) than the other goods.

2. Ordinal utility approach / Indifference curve analysis

It states the amount of satisfaction received from the consumption of a good cannot be measured quantitatively and similar to the cardinal approach goods that provide a higher level of satisfaction will be assigned higher ranks than those goods which gives the consumer a lower satisfaction.

These two above mentioned approaches are widely used by the producers to study about the choices of the consumers and to decide which good should be produced more compared to another.

Conclusion

Hence, as far as micro economics is considered, consumer is the most important person in an economy, and the way a consumer decides to rank a bundle above another bundle could affect the way in which an entire economy functions and for these obvious reasons micro economists will continue to focus on the choices made by consumers as it is very important to know what should be produced in a greater quantity and which brand will have an upper hand over others in a market.