The financial encyclopedia uses cookies to improve your user experience. Find out more here!



 

 


 

Consumers' preference
 

 

A term used to denote the relative strengths of consumers' wishes to consume various goods and services. In a free market capitalist economy resources are said to be allocated 'according to consumers' preference'. The way in which consumers divide up their total expenditure among the goods and services available is determined by their relative preferences (as well as by price). Total expenditure on each good or service then determines the output required from the firms producing it. This in turn determines (in conjunction with technological methods of production and prices of factors of production) how much of the scarce resources of the economy are used in producing each good. Thus the greater is consumer preference for a good, the greater the demand for it and hence the greater the amount of resources absorbed in its production. Similarly, changes in preferences will cause changes in relative demands and reallocation of resources from goods now less preferred, as compared to the original position, to goods now more preferred.

Reference: The Penguin Dictionary of Economics, 3rd edt.