Consumer Preferences

Consumer preferences represent the building block for assessing the value of any good or service relative to another. Once determined, a consumer may or may not wish to reveal a willingness to pay for an item given the asking price. Of course, assessing value is [Page 428]not always straightforward for the consumer. It can be an amalgamation of economic, aesthetic, and moral characteristics that are uniquely determined and weighted by each individual consumer. Of course, there may be a tension among those characteristics. As a result, a consumer's preferences could be highly flexible given changes in both his or her and society's outlooks. For example, the thought of purchasing a large sport utility vehicle may satisfy a personal preference for a powerful and spacious vehicle; but, at the same time, it may have to be reconciled with a social preference for reduced petroleum dependency and carbon dioxide emissions.

By reconciling the inherent tension, the consumer could assign a level of satisfaction (technically called marginal utility, MU) derived from owning a unit of the item in question. The way these marginal utilities change over different units of an item, as well as across units of other items, establishes the profile of the consumer's preferences. When an item is preferred over others, it is useful to consider this in terms of a range of purchasable items constrained by their prices (P) and the purchasing power of the consumer. After all, possessing a preference for an item that is not affordable does not say much about a consumer's actual purchasing patterns.

To understand and model consumer preferences, certain assumptions must be made. An important one is to assume that consumers behave rationally. For example, the assumption of consistency means that if one unit of Item A is preferred to one of B, then the opposite cannot be true at the same point in time. The assumption of transitivity means that if one unit of B is preferred to one unit of C, then the latter could not have been preferred to one unit of A. It is also useful to assume that marginal utility diminishes and the consumer can become satiated as more units of a particular item are purchased. In that case, one cannot say that Item A is always preferred to B because it depends on how many units of each the consumer possesses or has consumed. For example, consider a thirsty consumer on a hot day. Given a choice, he or she will likely use a vending machine dispensing sodas before one dispensing candy bars. Being thirsty the consumer will pay for any successive sodas he or she can afford up to and until the thirst is quenched. In effect, the consumer is trading off candy bars for sodas, but this trade-off is becoming less and less pronounced because of diminishing marginal utility for sodas. The first soda to a parched consumer is the one giving the greatest satisfaction and, therefore, worthy of foregoing the greatest amount of candy bars. But as the consumer's thirst is quenched a candy bar will become worthy of foregoing sodas. Of course, preferences for something habitual or compulsive may take a lot of purchases before satiation is reached. This helps explain the behavior of compulsive gamblers, alcoholics, and consumers with large credit card debts.

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