Description
You have been asked to assist your organization's marketing department to better understand how consumers make economic decisions.
Write a 1,050-word analysis that includes the following:
- The impact the theory of consumer choice has on:
- Demand curves
- Higher wages
- Higher interest rates
- The role asymmetric information has in many economic transactions
- The Condorcet Paradox and Arrow's Impossibility Theorem in the political economy
- People not being rational in behavior economics
Cite a minimum of 3 peer-reviewed sources not including your textbook.
Format consistent with APA guidelines.
Explanation & Answer
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Running head: THEORY OF CONSUMER CHOICE
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Theory of Consumer choice
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THEORY OF CONSUMER CHOICE
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Theory of Consumer choice
The theory of consumer choice usually concerns the manner in which preferences
determine both demand curve and consumption expenditure (Putler, 2008). The theory seeks to
address the following issues of concern: How wages influence labor supply; the effect of income
variations on consumption of goods; the reason to which demand curve slope downward and the
effect of a change in interest rates on household saving. Most critically, the theory aims to
explain how different consumers exploit utility given the budget constraint.
1. Demand curves
In most normal scenario, the demand curve is always downward sloping. Therefore, there
is inverse relationship between price and the demanded quantity. For instance, should the price
of tea rise, consumers would buy less of tea as they would shift to substitutes like coffee. As a
result, the total quantity of tea that consumers demand falls.
The level at which a rise in price leads to a fall in demand is regarded as the price
elasticity of demand or simply demand elasticity. For instance, if a 20% rise in price of tea
makes the quantity of tea demanded to fall by 20 %, the demand elasticity of bread is 1 (Richard,
2010). The demand curve is usually shallower for products that have more elastic demand, and
steeper for products with less elastic demand. The income effect can be used to explain why
demand curves slope downward. It articulates that as the p...