Economics Terms A-Z

Consumer Theory

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Also known as consumer choice, this term refers to the study of how and why people spend their money based on their preferences, and how they maximise the utility of their purchases while working within budget restraints. Some of the basic ideas of consumer theory state firstly that people try to make rational decisions which bring them the greatest utility; secondly, that people will always make multiple shopping trips, one not sufficing; and thirdly, that the more you use a product, the less you want it.

Consumer theory helps businesses predict which of their products is going to sell the best, and helps economists predict how the economy is going to change and develop. Businesses may use it to predict what the demand curve of a product is going to be, meaning they can figure out quantities. Consumption also generally contributes a lot to a country’s GDP, meaning economists use it as a part of their analysis of the economy.