IntroductionConsumer theory concerns preferences for goods and services for consumption, as well as consumption expenses and customer demand curves. Recently, there have been great housing bubbles in the world, especially among the US metropolitan areas. In part A, this paper seeks to analyze the concept of consumer theory regarding decision making of a dwelling residential for a better well-being. In part B, it attempts to analyze the connection between fundamentals and speculative house bubbles. Part 1Applications of Traditional vs. Behavioral Economics ExplanationsConsumer choice entails a theory of microeconomics, which concerns preferences for services and consumption goods to consumption expenses and eventually to customer demand curves.
The relationship between consumption, preferences, and the demand curve is among the most intimately surveyed connections in economics. Consumer choice theory refers to a means of examining how customers can attain equilibrium between expenditures and preferences through maximizing utility as subjected to budget constrictions (Mayumi and Gowdy2001). Preferences refer to desires by every person for the use for services and goods that turn into choices based on wealth or income for the combination of services and goods purchases with the customer’s time to explain consumption tasks.
There is a difference between consumption and production, rationally, due to the involvement of two various consumers. Firstly, the primary individual is the consumer, and secondly, a producer may create something that he may not consumer himself. Therefore, there is an engagement of two distinct abilities and motivations. The models of consumer theory are useful in the representation prospectively noticeable demand patterns of a single purchaser on constrained optimization proposition. prominent factors used in explaining the rate of purchasing or demanding of goods are the price for each unit of the good, consumer’s wealth, and prices of associated goods (Mankiw 2012).
Rich and Erb (2008) maintain that the basic demand theorem asserts that the consumption rate falls as the good’s price rises, which is the substitution effect. Explicitly, if an individual has inadequate money to pay for the good, he cannot purchase any of the goods. As the prices of goods increase, customers tend to substitute away from highly priced services and goods; hence, choosing less costly options.
Consequently, the consumer’s wealth increases, demand rises, and thus moving the demand curve to a higher point at all consumption rates. This phenomenon entails the income effect. Here, as consumer wealth increases, consumers tend to move away from lowly priced inferior services and goods; hence, selecting highly priced options. In consumer theory, there is utility, which describes the enjoyment and satisfaction derived from the use of a service or a good. When consumers behave sensibly, they will select between the various services and goods in order to maximize total utility or satisfaction.
Therefore, consumers tend to consider the amount of satisfaction derived from purchasing and consuming an additional unit of a service or a good. They think about the price that they should pay in order to buy the service or good. Besides, consumers also consider the satisfaction obtained from using optional products. Lastly, another consideration made by consumers before buying involves the prices of the substitute services or goods (Wells and Foxall 2012).