Brooke D'Sousa

          The science of running a successful business it is a complicated one. There are multiple factors that require consideration; some of them businesses can control, and others are solely in the hands of the consumer. Successful businesses know that although they can’t control every aspect that leads to revenue, they can prepare for different consumer behaviors, and they do so by studying the economics of consumer choices and behaviors. Our microeconomics textbook defines the ability of a good or service to satisfy wants using the term “utility”. Understanding utility is the basis for understanding consumer behavior and choice. It is a common belief held by economists that consumers are trying to maximize their total utility given their budget constraint. Even though a person’s tastes can be seen as a matter of personal preference, it is also believed that a person’s income, along with the cost of goods and services they consume, coupled with where they live, can be largely responsible for the direction of their choices ("Principles of Microeconomics").

 

            The process of determining marginal utility is the same for every product, however, the amount of total utility, or “utils”, will differ between individuals. Assumptions will need to be made to suppose a consumer’s budget, as well as the total utility a person will derive from a good or service, but the price component is less obscure. Using this information businesses can determine the marginal utility, which is the satisfaction received from one more incremental unit of a good or service consumed, and deduce a more rational outcome as to how a consumer might spend a set amount of money. Once this model is established, changes can be made to price and income to infer how those factors might affect consumption choices. Typically when income increases consumers purchase more of all products, though sometimes they may forego purchasing the same products and opt to purchase a luxury item instead. This could be purchasing steak instead of more ground beef, or purchasing a BMW instead of a Ford. Conversely, when income decreases, consumers will pull back and buy less of any product they feel isn’t essential to everyday life. Price changes can either lead a consumer to purchase more of something, say if prices were to lower, or purchase a substitute item because prices of a particular product increased, forcing them to look for alternative products depending on the product and their level of income.

 

            Businesses are in business to provide a good or service in exchange for compensation for that good or service. While profits are extremely important to the success and longevity of the business, there has to be somewhat of an analytical and systematic approach to pricing. Pricing is no doubt an important aspect of consumer behavior, but consumers are also sensitive to other influences that businesses may utilize to offset the impact of increasing prices per se. One of those influences could be the exceptional quality of a product, or an elevated customer service experience. Exceeding consumers’ expectations in product or service can help set your business apart from another that may offer a similar product or service. Therefore, if you were to increase the price of your product, your business is still giving consumers a reason to continue choosing to purchase from you despite the higher price. Having a basic understanding of common economic principles is essential to running a successful business in my opinion. It is also equally important to understand who your customer is, so more accurate assumptions can be made, in addition to the ability to remain somewhat flexible with the ebb and flow of the economic cycle.

 

Works Cited

 

“Chapter 5: Consumer Choices.” Principles of Microeconomics, www.openstax.com.