Courses : Intermediate Microeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Definition of Consumer Theory Consumer theory is a theory that explains consumer behavior in choosing the goods and services they want to buy, based on their preferences, utilities, and budget constraints. This theory is used in economics to analyze consumer decisions and determine the demand for goods and services in the market. In consumer theory, there are several basic assumptions used, including: 1. Rationality: Consumers are perceived as having sufficient information and being able to make rational decisions to maximize the satisfaction (utility) of the goods or services they consume. 2. Budget Limitations: Consumers have limited budget or budget to buy goods and services. 3. Transitive Preferences: Consumers have consistent and transitive preferences, meaning that if consumers prefer A over B, and B over C, then the consumer will definitely prefer A over C. 4. Decreasing Marginal Utility: Each additional consumption of a good or service provides additional satisfaction (utility), but that additional satisfaction tends to decrease as consumption increases. Consumer theory assumes that consumers act rationally in making decisions and try to maximize satisfaction (utility) from the goods and services they consume, based on their preferences. In the market context, this theory also helps to explain how the prices and availability of goods and services in the market affect consumer demand. Consumer theory is a branch of economics that studies consumer behavior in making purchasing decisions. Consumer theory assumes that consumers act rationally, that is, they maximize the satisfaction or utility derived from their spending, taking into account the available resources. Consumer theory suggests that consumers consider certain factors before making a purchase decision. These factors include: 1. Consumer income Consumer income is an important factor in determining purchasing decisions. The higher a consumer's income, the more goods and services they can buy. 2. Prices of goods and services Prices of goods and services are another important factor in purchasing decisions. Consumers will tend to choose goods or services that are cheaper than those that are more expensive, as long as the quality is the same. 3. Consumer preferences Consumer preferences refer to the preferences or tendencies that consumers have for certain types of goods or services. Consumers tend to choose goods or services according to their preferences. 4. Price of related goods The price of related goods, such as substitutes or competitive goods, also influences consumer purchasing decisions. If the price of substitute goods is cheaper or goods that compete better, consumers will tend to choose the goods or services. 5. Risk preference Risk preference refers to the consumer's tendency towards risk in decision making. Some consumers tend to take risks, while others prefer to avoid risks. Consumer theory also provides total and marginal utility curves. The total utility curve shows the total amount of satisfaction obtained from consuming a good or service, while the marginal utility curve shows the additional satisfaction obtained from consuming one additional unit of goods or services. The marginal utility curve decreases because the additional satisfaction derived from additional consumption decreases as the amount consumed increases. Consumer theory is a theory in economics that tries to explain consumer behavior in choosing goods and services to be consumed based on preferences, income, and prices of these goods and services. This theory is based on the assumption that consumers maximize the satisfaction or utility they get from spending their money. In consumer theory, there are several important concepts, including: 1. Preferences: Consumers have preferences or tendencies to choose one good or service over another. This preference is subjective and can differ from one consumer to another. 2. Utility: Utility is a measure of the satisfaction a consumer derives from consuming a good or service. Utility is also subjective and can vary from one consumer to another. 3. Budget Limitations: Consumers have limitations in their income or budget. Therefore, in choosing goods and services to be consumed, consumers must pay attention to the prices of these goods and services. 4. Prices of Goods and Services: Prices of goods and services influence consumer decisions in choosing goods and services to be consumed. Consumers will choose goods and services that provide the greatest utility for the price they can pay. In consumer theory, there are several assumptions used, including: a. Rationality Assumption: Consumers are assumed to be rational agents, who always maximize the utility of their money spent. b. Equilibrium Assumption: Consumers are assumed to always seek a balance between price and quantity of goods and services consumed. c. Continuity Assumption: The demand curve is assumed to be a continuous function and has a negative slope. d. Non-Satiety Assumption: Consumers always want more goods and services, and can never have enough. Using consumer theory, economists can predict how changes in price, income, or consumer preferences will affect the demand for a good or service. This allows policy makers to plan appropriate policies in an effort to improve people's welfare.