Question

4. Go to the eText and pull out a thorough definition of consumer choice. What is this concept? How does utility tie in with this concept? Explain the income and substitution effects. Also explain how they relate to consumer choice.

Answer 1

Consume Choice refers to the concept of decision related active operations of all the consumers by selecting the particular set of products based on their own interest. The concept of consumer choice is always connected with the concept of utility. When the consumers intends to buy the particular products, we need to consider the frequency of utility factor used when the every set of unit of products are purchased and consumed by the people. The firms need to consider the degree of utility is paired with the consumers choice of preference to buy and using additional products when they keep on consuming accordingly. Such additional utility of purchasing and consuming nature of the products is known as the Marginal Utility.

The rate of consumption highly depends upon the financial condition of the consumer. If suddenly the incomes decreases, the consumers will restrict to buy the goods of more quantity. The Rate of income and quantity of the goods purchased have always inverse relationship. This is known as Income effects. Substitution effects refers to the choice of consumers to prefer cheaper price rather than the same product having the high price. For example when the consumer uses to prefer public transport which have less transport fees rather than preferring private transport with high transport fees.

Both income and substitution effects are closely related to consumers choice. Both the effects are greatly influenced by the consumer choice. The purchasing power of the consumers are always has determined by the level of income and their preference over the expected monetary gain. With the availability of the cheaper goods with the same identical features when it compared with the superior goods, then the consumers will prefer to purchase the inferior goods only. Likewise the level of income determines the level of consumers purchase. If income is low, then the purchasing power of the consumers also decrease with the considerable effect. From above such explained facts, we can prove that the consumers choice is directly correlated with both effects.