Consumer Preferences and Microeconomics

Coke over Pepsi? Samsung over Apple? Nike over Adidas?

Why do these questions arise in an individual’s mind when he or she has to buy something to meet their needs and wants? The answer is pretty simple but understanding the concept is a little complicated. It is because of preferences set by consumers. The word ‘preference’ has a strong meaning. Consumers ‘prefer’ one good over the other/others. The options available to choose are ranked in different levels in the consumer’s mind and this varies from every other individual. The analysis and mechanisms of preferences set by consumers is a major part of microeconomics. The consumer is also known as ‘the king of microeconomics’ because these individuals determine every market activity and set the pitch for firms.

 

The ultimate goal for every firm in the market is to place their product in a very good position in every consumer’s mind. This determines the returns to them and their stability in the market. Depending upon the product’s nature, every firm uses various strategies and ideas to satisfy the king – the consumer. The concept of Unique Selling point (USP) as a very famous and essential business move or strategy, arises from the concept of preferences and consumer product positioning. Consumers choose goods or services that give them the highest level of satisfaction over the others, in relative measures. Choices are conditioned to circumstances and a ‘good choice’ makes a consumer arrive to a point where he or she obtains great satisfaction. Talking about consumer preferences in microeconomics, the concept has 2 approaches – utility approach and the indifference approach. Utility approach believes that the satisfaction derived from the consumption of products are measurable and thus choices can be made, whereas the indifference approach believes that consumers are able to rank products in line with their preferences from highest to lowest. Both approaches to consumer behaviour makes the consumer chose bundles of goods that give them the highest level of satisfaction, or the bundle which is ranked higher than the others. Consumers are said to be rational, if they minimize the costs (spending) and maximize the benefits (satisfaction) with complete knowledge about the product and its market. If Nike gives a consumer more satisfaction or is ranked higher than Adidas, then the consumer would prefer Nike over Adidas. The concept becomes easy if all consumers work in one way. But every individual is different and his/her choices vary according to numerous factors and prevailing conditions, which makes the concept a bit complicated.

There’s are a reason why consumers choose Samsung over apple, Coke over Pepsi, Nike over Adidas and many more options in various markets. This is solely because of the mechanism of consumer preferences which explains market activity and leads the branches of microeconomics.