How Consumers Make Economic Decisions

Introduction

The dilemma in making economic decision has been a major challenge to various consumers' in their daily dealings in the market. Therefore, in this paper, the impacts of theory of consumers' choice on the interest rates, higher wages and demand curve are analyzed. It will also examine the role of asymmetric information on various economic transactions and carry out an analysis on the Arrow's possibility theorem and Condorcet Voting Paradox. These factors and theories play a very vital role in influencing the consumers' behavior over time.

Influences of the consumers' choice on Demand Curves

In the market, demand usually refers to the consumers' willingness and ability to purchase a product. The demand is normally influenced by how the consumers behave in the market. Consumer theory therefore is a branch of microeconomics which mainly relates the consumers' preference, their demand curve to consumption expenditure. The theory mainly shows how the consumers tend to optimize their desires to consume while their rate of utility is subjected to a budget constraint ("Demand curves," n.d.). The demand curve normally has downward sloping gradients which show the inverse relationship between the quantity demanded and the price levels. The reasons behind the downward sloping demand curves is due to substitution effects, the income effects and diminishing marginal utility of the consumers. In the event where the consumers consume more products, their additional benefits tend to fall hence they are expected to pay less amount in the market. These thus make the demand curve to slope downwards. On the other hand, as income of the consumers' increases, they will tend to consume a lot of cash due to ratchet effect hence causing a shift on the demand curve to the right. However, these are not possible in the case of Giffen and Veblen goods.

On the other hand, the consumption expenditures also depend on the consumers' tastes and preferences. When the products in the market are liked by most of the consumers in the market, they will tend to spend more on them hence a shift in the demand curve to the right and vice versa. Therefore, consumer theory is very important in explaining the effects of the consumers' behavior on the demand schedule and curve.

Effects on the consumer choice theory on the higher interest rates

The impacts of the consumer theory on the level of interest can either be negative or positive. In the situation where the consumer spending on consumption is high, the interest rates will also tend to be higher. It is because, the consumers will devote a lot of income to the commodities which they prefer, a process which indirectly causes an incline in the interest rates as the rate of borrowing for investment purposes increases. Conversely, when the consumption expenditure is low, the interest rates will decline as a result of consumers' low purchasing power.

In the market, it is quite possible for the interest rates to either fall or rise and this will tend to have an impact on the spending of the consumers. However, the main determinants of the changes in the level of interest rates are the consumers' attitude to either spent or save with reference to changes in the level of interest rates. These attitude is mainly influence by the concepts and principles of the consumer theory.

In certain circumstances, the level of consumers' wealth also plays a role in defining the level of interest rates. For instance an incline in wealth of consumers tend to increase the interest rates hence leading to an incline in their purchasing power. These in effect aid in maintaining the interest rates at a higher levels.

Impacts of the consumers' choice on Higher Wages

If the consumer increases the desire for the preferred commodity by increasing its utility, that means the budget will be high making the higher wages to be lower. If consumer reduces the desire for the preferred commodity, the higher wages will be affected positively because fewer prices will be used to purchase the commodity. If the price of the preferred commodity rises, consumers will spent much on the same good leading to the reduction of the higher wages because of the increase in the expenses.

On the other hand, reduction on the prices of the preferred commodity will make the consumers to spend less on their wages having low effects on the higher wages. If the prices of the related commodities rise, consumers will avoid purchasing them and the higher wages will be affected least since the consumers will purchase a commodity with lower prices. Consequently if the prices of the related commodity lower consumers will spend less of their wages making the higher wages to be less affected.

Role of Asymmetric information as in various economic transactions

In the market, when the buyers and sellers do not have a perfect knowledge or information about the products they trade in, the outcome can tend to be uncertain. It normally affects various transactions in various segments of the market. In the financial market, the information has been a problem as far as borrowing and lending is concerned. For instance, when the buyer have more information as compared to the lender, it will be very difficult for the lender to identify whether the borrower will default the amount ("Asymmetric information problem | Economics Help," n.d.). However, the lender can overcome such dilemma by checking at the past credit history so as to define the credit worthiness. It also affects the insurance industry when the insurance company is uncertain that the insured will take good care of the property which is covered by the insurance policies. To overcome such problems, the insurances companies normally give a discount to a no claim bonuses to the customers.

The Arrow's Impossibility Theorem and Condorcet Paradox in the Political Economy

In the political economy, the voters tend to make decision on who they should elect as their preferred candidate. According to Condorcet theory, there is no single candidate in the election who can be selected by the society and beat all others in a pairwise comparison. Therefore, If such candidate do exist, then they are referred to as a Condorcet winner. The paradox states that the collective preferences of the voters can tend to be cyclic while those of particular individuals are not cyclic. It thus shows that in the political economy, majority's wishes can be in conflict with one another due to the fact that the conflicting majorities have different tastes and preferences. These arguments are supported by Arrows argument which states that it is not possible to have a clear order of preference when the mandatory principles of fair voting procedures are adhered ("Arrow's Theorem Proves No Voting System is Perfect - The Tech," n.d.). It can thus be said that in a political economy, consumers will choose the product or a person of their choice depending on how that product is of importance to them. They will go for a person whom they see he can satisfy their needs most and leave the alternative. For example if there are two contestants, they will prefer one who has the qualities of their choice, without being forced.

People are not rational in behavior economics

During decision making process, consumers are considered to be either rational or irrational. The rational consumers can make a choice since they want to satisfy their pleasure while the irrational behaviors tend to make inaccurate choices due the effect of paradox of choices, availability bias and the effect of being social beings. However, at some point, the irrational people in behavior economic may be influence to choose a commodity which satisfies them. They may be forced to make rational decision of a given commodity.

References

Arrow's Theorem Proves No Voting System is Perfect - The Tech. (n.d.). Retrieved from http://tech.mit.edu/V123/N8/8voting.8n.html

Asymmetric information problem | Economics Help. (n.d.). Retrieved from http://www.economicshelp.org/blog/glossary/asymmetric-information/

Demand curves. (n.d.). Retrieved from http://www.economicsonline.co.uk/Competitive_markets/Demand_curves.html

https://ocw.mit.edu/courses/economics/14-75-political-economy-and-economic-development-fall-2012/lecture-notes/MIT14_75F12_Lec12.pdf. (n.d.). Retrieved from https://ocw.mit.edu/courses/economics/14-75-political-economy-and-economic-development-fall-2012/lecture-notes/MIT14_75F12_Lec12.pdf

The Irrational Consumer: Why Economics Is Dead Wrong About How We Make Choices - The Atlantic. (n.d.). Retrieved from https://www.theatlantic.com/business/archive/2013/01/the-irrational-consumer-why-economics-is-dead-wrong-about-how-we-make-choices/267255/