Consumer preferences and marginal utility, general concepts

Consumer preferences are such a tool for studying demand, which allows you to identify which goods and to what extent are in demand among the target audience. The decisions of buyers regarding consumption of specific goods are the basis for creating market demand. Understanding the needs of your potential buyer is the key to obtaining a guaranteed profit. Therefore, marketing research, the purpose of which is to identify these preferences, are relevant both at the stage of production planning and at all stages of product realization, including control of its quality. Of course, consumer preferences alone can not provide accurate data sufficient to predict what kind of demand the product will use. After all, demand is formed under the influence of many factors.

Consumer preferences can be measured. In their analysis, the concept of marginal utility is used. It was used more than 150 years ago by the German Gossen, whose followers became the founders of the Austrian and mathematical school in the economy. It was Gossen who first began to study consumer preferences so closely, and the marginal utility in his definition is an additional utility derived from each subsequent consumed good. A classic example is a lonely settler in the forest and several bags of grain. Then the first bag is designed to save him from starving to death, then the fifth is to feed the parrot, entertaining the owner with his chatter. It is clear that in this case the utility of the fifth bag will be limiting.

Based on experiments and psychological observations by economists of the 19th century, The law of diminishing marginal utility was derived. It was found that as the certain utility is saturated, the value of the thing in the eyes of its owner also decreases. Does marginal utility affect the market price? Yes, of course, because the price is determined, among other things, by the marginal utility of the last part of the consumed goods. So, the less available the product, the more difficult it is to satisfy the need for it - the higher will be the marginal utility, and accordingly, the price. How is this law and consumer preferences related? It's simple: the buyer constantly weighs the marginal utility of the goods and compares different goods in this way, compares them among themselves. If the product loses its usefulness, the buyer will replace it with another.

Typically, consumer preferences are not applied to one particular product, but to a whole group. We study the range of goods systematically consumed by a certain target audience. That is, we are talking about a comprehensive study of the preferred products: shoes, clothes, food. In this case, the factors affecting the preferences include objective (own income, quality and value of the goods) and subjective (personal tastes).

When studying and measuring consumer preferences, it is most convenient to use graphs. If a cardinal approach is used in their construction, the graph of total or marginal utility is a function of the quantity of the goods consumed. It is assumed that the buyer ranks the benefits within its basket of consumption according to their utility level.

Ordinalist approach involves the construction of curves of indifference, that is, such graphs, each point on which are equal to the consumer of the good with the same level of utility. More details with these approaches to measuring consumer preferences and examples of graphs can be found in the specialized literature.

The next stage in the evaluation of demand is the correlation of the identified preferences with the financial possibilities, i.e. Budget analysis. The choice of the consumer is the result of optimization, when the buyer distributes the income so that the last monetary unit expended on each product gives the same marginal utility.

According to the consumers' reaction to the change in prices and revenues, they can be grouped into different groups ( income level , consumption types ) and graphically display market and individual demand.