Economic Model of CB

Under economics, it is assumed that man is a rational human being who will evaluate all the
alternatives in terms of cost and value received and select that product or service which gives
maximum satisfaction. Consumers are assumed to follow the principle of maximum utility based on
the law of diminishing marginal utility. With limited purchasing power and a set of needs and tastes,
a consumer will allocate expenditure over different products at given prices so as to maximise utility.

The Economic model of consumer behaviour is unidimensional. This implies that buying decisions of
a person are governed by the concept of utility.

A rational man will make purchase decisions with the intention of maximising the utility. The
economic model is based on certain predictions of buying behaviour.

(i) Price effect–the less the price of the product, the more will be the quantity purchased.
(ii) Substitution effect–the less the price of the substitute product, the less will be the
quantity of the original product bought.
(iii) Income effect–the more the purchasing power, the more will be the quantity purchased.

The assumption about the rational behaviour of human beings has been challenged by the
behavioural scientists. They are of the opinion that the model only explains how a consumer
ought to behave, it does not throw light on how the consumer actually behaves.

Iceberg Theory/Freudian Theory/psychoanalytical theory

By Sigmund Freud, views consumer behaviour as being influenced by psychological elements and
aids marketers in a great way while designing a product message to influence the psychological
needs of consumer. Freud observed the role of instinctive needs (id), social influence (superego) and
action (ego), to conclude that, behaviour is the result of interaction of these three systems.

Psychoanalytic theory separates the human psyche into three forces: id, ego and super ego.

 Id: The id is responsible for primitive drives and urges. Operating on the pleasure principle, the id
avoids tension and seeks pleasure. It is also referred to as the unconscious mind.
 Ego: Ego is the conscious mind. It operates on the reality principle. The ego develops from the id
because there are limitations if the id operates in the real world. The ego is composed of
perceptions, thoughts, memories and feelings. It provides a person with a sense of identity and
continuity. As an internal drive and conscious, the ego is the executive aspect of personality.
 Super Ego: Super ego is the moral and ethical dimension of the human psychic structure. It
controls the basic desires of the id. The super ego can interrupt the social system and influences
the ego. It also helps individuals strive for perfection and pursue goals that match the morality
parameters set by society and culture.

Microeconomic Model

Microeconomics is the study of the actions of consumers and producers in specific markets
for goods and services. Micro economists concentrate on explaining what consumers would
purchase and in what quantities these purchases would be made. Theory of consumer
behavior in Economics describes how consumers allocate incomes among different goods
and services to maximize their utility. Here consumer behavior is best understood in three
distinct steps - consumer preferences, budget constraints, and consumer choices. Theory of
consumer behavior is surrounded with the fence of assumptions and the primary among these
are:

• Consumers’ wants and needs are unlimited and therefore cannot be fully satisfied.
• Consumers’ limited purchasing power (budget) makes them to allocate the same in a way
that maximize satisfaction of their wants and needs.
• Consumers’ preferences are consistent over time and they are developed independently.
• Consumers have perfect knowledge i.e. they know exactly how much satisfaction they
can gain from the consumption of particular product.
• The consumers follow the law of Diminishing Marginal Utility (DMU). According to
this law, an equal additional unit of a good is consumed, everything else remaining
constant, satisfaction will increase, but at a diminishing rate. Thus, ceteris paribus, each
additional unit of a good consumed will yield less extra satisfaction than the previous
unit consumed.
• Price is the single decisive factor to measure the sacrifice involved in obtaining a
product.
• Consumers are perfectly rational i.e. with their subjective preferences; they will always
act in a planned manner to maximize their satisfaction.
With these assumptions, economists believed that perfectly rational consumers will always
purchase the goods that provide the highest ratio of additional benefit to cost.