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Consumer Behavior Theory

Consumer behavior theory, together with models derived from such theory, is intended to (a) identify consumer variables, (b) explain relationships between the variables, (c) develop operational definitions for the variables, and (d) specify cause-and-effect outcomes from variable interactions. Neoclassical economic theory applied to consumer behavior tends to assume that benefit (utility) maximization describes consumer behavior over a life time (Kivetz & Simonson, 2002).

In economic theory, consumer behavior is addressed within the concepts of consumer preference and consumer surplus. Consumers' surplus is the excess amount a consumer is willing to pay for a good, as opposed to doing without it, over the amount actually paid for the good. A consumers' surplus can exist only within the context of the concept of diminishing marginal utility. This concept holds that, at some point, consumption of additional incremental quantities of a good will yield successively smaller increases in utility. Thus, it is assumed that an individual will be willing to pay more for the first unit of consumption than for a unit consumed at some point further along. If the actual price paid for a good is assumed to be its marginal price, then the sum of the differences between that price and the prices than one would be willing to pay for earlier units in the consumption chain (assuming a limitation on supply which would cause prices for earlier consumption to be higher) and the marginal price constitutes the consumer surplus. The concept of diminishing marginal utility, and, thus, the size of the consumers' surplus, rests upon an assumption that, up to a point, demand for a good will increase, as the price of the good decreases.

While utility maximization and diminishing marginal utility can explain the sale of lottery tickets within the context of the small size of the outlay and the large size of the potential return, it cannot explain effect...

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Consumer Behavior Theory. (1969, December 31). In LotsofEssays.com. Retrieved 14:22, October 21, 2014, from http://www.lotsofessays.com/viewpaper/1683416.html