The microeconomic theory
The identified microeconomic theory was the consumer demand theory. The consumer demand theory falls under the branch of economics that deals with the study of consumer behaviors applying to decisions related to purchase of goods and services in the market. The theory provides a deep insight into understanding market demand and forms the cornerstone of the modern microeconomics (Salvatore, 2002).
Properties and characteristics of the theory
The consumer demand theory generally analyzes consumer behavior in terms of market purchases that are based on satisfaction of needs and wants achieved after consuming a product. The main property of the theory is utility maximization. Economists are most interested in determining how the demand of a product affects its consumption pattern among consumers. Utility maximization is generated from analyzing total utility and marginal utility derived after consumption of a good or a service. The consumer demand theory is explained by a demand curve shown in figure 1.
Figure 1: A demand curve
Characteristics of the theory
The demand curve shown in figure 1 represents the relationship between price and quantity, which are characteristics of consumer demand theory. These two characteristics form the starting point for building a strong consumer behavior model. The determinants of demand include customer needs, preferences, consumption habit, price of substitutes, price of compliments, and income. From the curve shown in figure 1, the quantity demanded is inversely proportional to supply. At higher prices, customer’s demands are less compared to the demands at lower prices (Mark, Brown and Pierson, 2001, p. 31).
- The supply of a product is expressed in form of utility
This is a major characteristic of the consumer demand theory based on the assumption that the number of utility generated after consuming a given product is measurable. According to the theory, the total utility generated after consuming a product is a factor of the product price and demand. When expressed in monetary terms, the greater the amount consumed the lower the marginal utility and the less the consumer will be willing to pay (Mark, Brown and Pierson, 2001, p. 33).
- The theory uses the law of demand and supply to determine the relationship between consumer consumption and supply
The above characteristic is used by many economists and business people to determine the amount of goods and services to offer to the market and at which price. The following characteristic also provides an approach that allows entrepreneurs know consumer preferences and how they change with changing supply and income levels. In addition, the characteristic plays a major role in predicting the nature of demand in the future through looking at consumer behavior and preceding economic status of a nation (Consumer Demand Theory, 2014).
- The theory determines the price of substitute products
Consumers always look for products whose prices favor the pocket and at the same time meet expectations. The consumer demand theory tries to research on how consumers change their buying behavior and opt for substitute goods and services when the supply or demand changes.
How the theory is used in actions and interactions of individual actors in the economy
The consumer demand theory finds many applications in actions and interactions of individual actors in the economy. All factors of production depend on the demand of a particular product. Business managers use the consumer demand theory to determine the sources of demand, determinants of demand, how buyers decide quantity of products purchased, and how buyers respond to price changes (Postlewaite, 2009).
Firstly, the theory is used in finding the consumer individual’s demand for goods and services as a function of price. Through the demand supply curve, economists use the demand theory to derive formulas for determining the amount demanded by a consumer for a particular good given a fixed price, fixed income, and utility. Under consumer actions, the theory determines the basis of consumer demand using a product’s utility under two angles: the commodity angle and the consumer angle. Under the commodity angle, the theory is applied when determining the satisfaction a consumer gets after consuming a product, the ethnically neutral concept, the pre-consumption phenomenon, and the moral principles of consumer behavior. Under the consumer angle, the theory focuses on the feeling of satisfaction expressed by a consumer, the post consumption phenomenon, and the relative subject.
Secondly, using the law of demand “the demand of a commodity is inversely proportional to its price” the theory is used in determining price response of consumers. The response to price of a commodity from a consumer is a factor of the income level and substitution effect. Economists use the theory to analyze the interaction between the consumer and the demand by decomposing changes in demand into two effects. The above aspect helps in gaining more information used to determine the impact of inflation on consumer behavior.
During harsh economic times, countries tend to increase tax rates that in return increase tax revenue. The price response determines the quantity demanded and what product is due for substitution. The price response to a product is a sum of substitution and income effects. The substitution effects are negative because when prices increase and the consumer income is low, alternative products are purchased. In addition, the income effect is positive for normal goods and negative for inferior goods.
Finally, the theory is used by manufacturers and wholesalers to determine the amount to offer in the market and at what price. Manufacturers and wholesalers depend on the information collected from the ground to determine the price of products. The application of this theory finds use in analyzing the interaction between consumers, demand and supply forms the basis for production. According to Mark, Brown and Pierson (2001), the demand of a product influences the decision by suppliers to determine the quantity to supply. If consumer demand is high at a certain time of the year, manufacturers are tempted to produce more and offer lower prices in order for more consumers to purchase the product. Using the consumer demand theory, wholesalers draw demand and supply curves that guide the production decision. In addition, the purchasing power of a consumer influences the demand of a product affecting production and supply (Mark, Brown and Pierson, 2001).
The effect the theory has or may have on your actions as a consumer
The consumer demand theory has many effects towards a consumer as discussed below. Firstly, the theory changes the way a consumer thinks in terms of prices of goods and services. Using the demand curve, the consumer can easily determine when to buy a product and at what minimum price to purchase. In addition, the theory gives a consumer a chance to negotiate for prices with sellers especially when the demand for the product is low and the supply is high. Radonjic (2008) argued that microeconomic theories have played a major role in changing consumer behaviors by educating them more on the relationship between demand, supply, prices, and substitutes. Understanding this theory helps me as a consumer budget my income and make the correct choices when it comes to buying of goods and services.
Secondly, the consumer theory influences the consumer choice of goods and services. Consumer behavior changes with changes in demand, supply, and the level of income. Application of the theory gives a consumer new ideas on how to look for substitute goods, or waits for the demand to decrease in case the product is not a basic need. It has the capacity to change the actions of a consumer through influencing the purchasing behavior. Consumers are more likely to research more about the prices of commodity offered in the market and their respective demands before making a purchase decision.
Strategies in this theory that could help in a professional career of medicine
The consumer demand theory can found application in the medicine profession through various ways. To start with, when the demand for a medicine course if high the offering institutions are more likely to increase the entry points. When more people apply for the medicine career, the college administration uses the consumer demand theory to draw a demand curve that assists in determining the minimum entry points depending on the number of admissions available. On the other hand, the theory is applied when selecting graduates to fill medicine vacancies in various health care centers. When a large number of people graduate in medicine, employers make use of the theory of consumer demand to eliminate some candidates. Elimination process occurs through the application of the theory.
Consumer Demand Theory, (2014). AmosWEB Encyclonomic WEB*pedia, Accessed: June 21,
http://www.AmosWEB.com, AmosWEB LLC, 2000-2014.
Mark, J., Brown, F. and Pierson, B. J. (2001). “Consumer demand theory, goods and
characteristics: Breathing empirical content into the Lancastrian approach.“ Manage. Decis. Econ., 2: 32–39.
Postlewaite, A. (2009). “American Economic Journal: Microeconomics.” American Economic
Review, 99(2), 683-684.
Radonjic, O. (2008). “Limitations of modern microeconomic theory of consumer choice:
Sociological perspective,” Sociologija, 50(3), 313-326.
Salvatore, D. (2003). Microeconomics: Theory and applications. New York: Oxford University