Theory of Consumer Behaviour Explained for Commerce Students

The Behaviourist theory of consumer behaviour focuses on observable actions rather than internal thoughts or feelings. It suggests that purchasing decisions are influenced mainly by external factors like advertising, social influences, and environmental cues. This approach relies on learning and conditioning, where consumers develop specific buying habits in response to rewards or stimuli. By examining these external triggers, marketers can predict and shape consumer choices more effectively. The behaviourist theory highlights the importance of market signals and environmental factors in planning successful business strategies.

Consumer behaviour can be grouped into four main types, each based on the degree of involvement and the nature of the purchase. These types help businesses understand how buyers make decisions in different scenarios. The four types are:

• Complex buying behaviour – Occurs when making significant purchases that involve extensive research.
• Dissonance-reducing buying behaviour – Happens when consumers are highly involved but see few differences among brands.
• Habitual buying behaviour – Applies to routine purchases with low involvement and brand differences.
• Variety-seeking buying behaviour – Occurs when people frequently switch brands, often for fun or to try something new.

The theory of consumer behavior was developed over time by several economists, each making important contributions to the field. Notably, Alfred Marshall introduced the concept of utility and consumer choice in his early work. Later, economists like J.R. Hicks and Paul Samuelson developed more advanced models like the indifference curve analysis and revealed preference theory. Their insights allow economists to model how consumers allocate budgets and respond to price changes. Today, the theory stands as a major pillar of microeconomics, shaped by many contributors.

Understanding consumer behaviour is crucial because it helps explain how individuals and households make choices in the marketplace. It reveals how factors such as price, income, preferences, and social influences shape demand for goods and services. This understanding is vital for:

• Predicting demand trends and market reactions
• Designing effective pricing and marketing strategies
• Formulating public policies, such as taxes or subsidies, that affect consumption

Utility theory is a core part of the theory of consumer behaviour and explains how people decide what to buy based on the satisfaction, or "utility," they expect from consuming goods and services. Consumers aim to maximize their total utility within the limits of their income and budget constraints. The concept includes two main approaches: cardinal utility, which measures satisfaction in units, and ordinal utility, which ranks preferences without assigning numbers. By weighing utility against prices and budget limits, individuals select combinations of goods that give them the greatest possible satisfaction.

Consumer behaviour is shaped by a mix of internal and external influences. Internally, factors like personal preferences, attitudes, motivation, and perceptions affect decisions. Externally, factors such as cultural background, social status, family, reference groups, marketing efforts, and economic conditions play a significant role. For example, advertising can create new desires, while a change in income may shift buying patterns. Recognizing these influences helps brands and policymakers anticipate consumer trends and design offerings that better align with people’s real needs and circumstances.

The cardinal and ordinal approaches are two methods economists use to analyze consumer preferences and utility. The cardinal approach assumes that utility can be measured in numbers, allowing consumers to state exactly how much satisfaction a product provides (e.g., 10 units of utility). In contrast, the ordinal approach focuses only on ranking preferences—consumers can say they prefer tea over coffee but do not assign numbers to these choices. Both approaches help explain how consumers allocate spending, but the ordinal approach is more realistic, as satisfaction is rarely measurable in precise units.

Indifference curves are a key tool in the theory of consumer behaviour. They show combinations of two goods that provide the same level of satisfaction, so a consumer is indifferent between them. Consumer equilibrium occurs where the highest possible indifference curve touches the budget line, meaning the consumer has maximized utility given their income and the prices of goods. At this point, the marginal rate of substitution equals the ratio of prices for the two goods. Indifference curves help visualize how consumers optimize their choices in real-life situations.

The law of diminishing marginal utility states that as a person consumes more units of a good, the additional satisfaction from each extra unit decreases. This principle helps explain consumer choice and spending patterns. For example, the first slice of pizza is highly enjoyable, but each additional slice gives less satisfaction. As a result, consumers spread their spending across different products instead of buying more and more of the same item. Understanding this law helps companies set prices and product quantities that better suit consumer preferences.

Revealed preference theory is a modern approach to analyzing consumer choices. Instead of relying on what consumers say about their preferences, it examines actual purchases to deduce which options people prefer. By observing the combinations of goods that individuals select at different prices and incomes, economists can reveal underlying preferences. This approach is useful because it is based on real behaviour rather than assumptions. Revealed preference theory provides a practical way to predict demand and model changes in consumer behaviour.