CONSUMER PREFERENCES

Life is like a giant store. Every day you wake up and you confront with thousands of goods you might buy. People are always trying to make themselves as well-off as possible. Some of those goods on offer at the store may help you to make you better off. So how do you decide what to buy from the store of life? In order to decide what to buy from the store, you first have to consider your preferences for various types of quantities and goods. Normally, a responsible individual will also have to consider his budget when deciding what bundles of goods to buy but let’s start by imagining that there are no constraints and you can buy whatever you want. But even now, you will have to think about your preferences. And because you are not just a millionaire, you are a rational millionaire, these preferences are going to follow some rules. 

First, when you are considering two bundles of goods you either prefer one or the other or you are indifferent between the two.

Second, your preferences should be logically consistent, that is if Zac prefer whiskey over vodka and vodka over rum, then Zac will have to prefer whiskey over rum and third, more is always better (3 shots  > 2 shots).

In order to form a preference, we take satisfaction into consideration. This means that Zac would derive a higher level of satisfaction on consuming whiskey than what he gets on the consumption of Rum. This satisfaction derived from the consumption of a commodity is called utility. You as a consumer are expected to behave in such a way that you maximise your level of satisfaction. Although in reality, consumers aren’t always rational in the decisions they make.

It is often helpful to represent preferences using a graph just like a map condenses an entire city into lines which help us to travel from point A to point B or how an emoji connects your mood into a single yellow face. 

We use the same strategy to represent your preferences condensing your feelings about a good into a simplified map. Suppose, that you are at your breakfast table and the only two items you have is apples and bananas. Now consider three choices; two apples and one banana, one apple and two bananas or two apples and two bananas. Since more is always better, you will prefer the third option over the other two. But let’s assume that you are happy with either of the first two options, that is, you are indifferent between these two bundles. We can now plot an indifference curve that passes from point A and B (A being two apples and one banana and B being one apple and two bananas). 

All points on this curve represents bundles between which you are indifferent. Now let us consider the option in which you could have two apples and two bananas. As established earlier that you would prefer this option over the other two (more is always better). Hence, this bundle would lie on a higher indifference curve and you’d prefer any bundle on this higher indifference curve over any bundle on the lower indifference curve.

The above article gives a rudimentary understanding of how a consumer forms his preferences. It is important to have a strong understanding of the basics in order to understand why a consumer behaves the way he does.