Models of Consumer Behavior

Comprehensive verbal models have been employed most often in the study of consumer behavior. A variety of such models exist each taking a somewhat different view of consumers. Those chosen for presentation here are well known and represent a broad perspective. The first two represent traditional approaches to the study of consumers, while more contemporary viewpoints are presented next.

Traditional Models of consumers:

The earliest comprehensive consumer’s models were actually devised by economists seeking to understand economic systems. Economics involves the study of how scarce resources are allocated among unlimited wants and needs. Its two major disciplines — macroeconomics and microeconomics – have each developed alternative views of consumers. Partially because they have undergone some modernization, these models still influence contemporary view of consumers.

Microeconomic Model:

The classical microeconomic approach developed early in the nineteenth century, focused on the pattern of goods and prices in the entire economy. It involved making a series of assumptions about the nature of the average consumer and then developing a theory useful in explaining the workings of an economy made up of many such people. Focus was placed on the consumer’s act of the purchase which of course is only a portion of what we have defined as consumer behavior. Thus, microeconomists concentrated on explaining what consumers would purchase and in what quantities this purchase would be made. The tastes and preferences leading to these purchases we assumed to be known already. Therefore, macroeconomists chose to ignore why consumers develop various needs and preferences and how consumers rank these needs and preferences

The resulting theory was based on a number of assumptions about consumers. Primary among these were the following;

1) Consumers wants and needs are, in total unlimited and therefore cannot be fully satisfied.
2) Given a limited budget, consumer goals are to allocate available purchasing dollars in a way that maximizes satisfaction of their wants and needs.
3) Consumers independently develop their own preferences without the influence of others and these preferences are consistent over time.
4) Consumers have perfect knowledge of the utility of an item that is they know exactly how much satisfaction the product can give them.
5) As additional units of a given product or service are required the marginal (additional) satisfaction or utility provided by the next unit will be less than the marginal satisfaction or utility provided by previously purchased units. This is referred to as the law of diminishing marginal utility.
6) Consumers use the price of a good as the sole measure of the sacrifice involved in obtaining it. Price plays no other role in the purchase decision.
7) Consumers are perfectly rational in that, given their subjective preferences, they will always act in a deliberate manner to maximize their satisfaction.

Given these assumptions economists argued that perfectly rational consumers will always purchase the good that provides them with highest ratio of additional benefit to cost, For any given good this benefit /cost ratio, can be expressed as a ratio of its marginal utility to price (MU /P). Therefore it can be shown that the consumer would seek to achieve a situation where the following expressions holds for any number (n) of goods;

MU1 /P1 = MU2 /P2 = MU3 /P3 =……..= MUn /Pn

If any one product’s ratio is greater than the others, the consumers can achieve greater satisfaction per dollar from it and will immediately purchase more of it. Provided there is an adequate budget the consumer will continue purchasing until the product’s declining marginal reduces its MU/P ratio to a position equal to all other ratios. Additional purchasing of that good will then stop.

Source: Consumer Behavior