The Principles of Agriculture Economics class at Barton Community College is currently exploring consumer choices and how they make those choices when selecting foodstuffs at the store. This discussion also includes the direct buyers of crops and livestock off the farm and ranch. It is helpful to remember that while economics is rife with numbers, charts, and statistics, economics is at its core a social science trying to explain and predict human behavior. This week’s column explains how these choices made. Next week - how does agriculture respond?
Briefly, here are the assumptions made regarding consumers:
• Consumers are rational. The choices they make are purposeful and consistent. They do something as long as the benefits outweigh the cost. The bottom line is rationality makes it possible to predict behavior.
• Individuals (or companies) do the best they can given budget and income constraints.
• Consumers are seeking the most satisfaction (utility) possible given constraints.
• Consumers obey the Law of Diminishing Marginal Utility since they are rational. Simply put, satisfaction (utility) decreases as each additional unit is consumed. That doesn’t mean total satisfaction declines but each additional unit is a little less satisfying and eventually total satisfaction would become negative.
• Under the previously mentioned law, the following are assumptions: variety is the spice of life; been there done that; the first time is the best. Or we enjoy consuming a variety of goods and services; trying something once in many areas may be enough; the first time we try something is typically the best or mast satisfying.
• Consumer preferences are complete. You will either like A over B, B over A, or you are indifferent (you don’t care).
• Consumer behavior is consistent. If you prefer A over B and B over C, you must prefer A over C.
• Consumers prefer more to less. Consumers will always want more within the limits of rational behavior.
• Relative prices, the price of goods compared to each other, drive consumer choice since consumers work under budget constraints. Since consumers want more, they will shift to less expensive items to obtain more.
While this may seem logical, or not, these assumptions are used to predict consumer behavior and help producers determine how to provide goods and services in order to maximize profits. Finally, keep in mind that in dealing with us (human beings), we are hard to predict and have been known to not act rationally. Next week – how agriculture responds to consumers preferences.