Friday, January 25, 2013

Happiness Economics

          The study of economics has been extremely beneficial in explaining the changes in the market the overall consumer behavior. Over a period, statistics have been collected regarding the changes in consumer behavior in regard to their purchasing behavior and budgetary allocations. In this regard, the analysis of the compiled reports shows that consumers engage in daily purchasing of goods and services in order to enhance satisfaction of their needs and want. Various commodities used by the consumers have different amounts of utilities. Consumer utility refers to the ability of the commodity or service to satisfy the needs or the wants of the consumer. Generally, the population believes that happiness with an increase in income. However, in his studies, Easterlin believes that increase in wealth does not result in a corresponding advancement in the rate of happiness. He remarkably stated that human happiness is derived from factors that are free. The free elements have a substantial contribution towards enhancing increased happiness. He illustrates that the immense amount of happiness is derived from the relationships with friends and family than from the increment in income. In his findings, he stated the example of the United States that has experienced tremendous development in terms of the economic development. He observed the records stating that the nation has experienced a tremendous increase in living standards but the happiness rates have remained stagnant at 43%. This provides that evidence of the consumer behavior observation that the amount of happiness derived the enhancement of higher income increases gradually. Upon reaching the optimal point, consumers will experience diminishing marginal returns and they do not derive any benefit from the extra income.

The theory of consumer behavior
          The analysis of consumer behavior is an essential aspect of behavioral economics that explains the decisions made by the consumers. This study is critical because it identifies the choices and circumstances facing the consumers in their quest to satisfy their wants and needs. The analysis of behavioral economics recognizes that consumers are faced with challenges regarding the choice of commodities, market price changes, budget constraints and the law of diminishing returns. The study and analysis of consumer behavior encompasses various sub topics as discussed below.

The law of diminishing returns
          The law of diminishing is significant in the analysis of consumer behavior because it states the fundamental aspects leading to spontaneous changes in behavior. The law of diminishing returns takes into consideration that fact that commodities used by consumers leads to the satisfaction of their utility. Therefore, increased consumption of the commodity will lead to increased satisfaction of the consumer utility. However, over the period it has been observed that any extra amount of commodity consumed by the consumers leads to extra satisfaction. With the increase in consumption, marginal utility derived from the extra commodity diminishes. The law of diminishing returns is extremely beneficial in explaining the changes in consumer behavior. An example to illustrate their findings shows the desire to the first bottle of coca cola is so that consumers are willing to pay a large amount of money toHowever, with an increase in the consumption of the commodity, the desire to consume the commodity declines because of the law of the diminishing returns. In this regard, marginal utility derived from consuming the bottle of coca cola declines with increased consumption.

          In the same context, Easterlin notes that happiness is not derived from the attainment of the high amount of income. Instead, happiness is derived from engaging in social activities that do not have monetary value. He claims that money/salary is incidental. The professor of happiness economics is convinced that happiness is derived from the company of family and friends. In his studies, he cites various events to back his support based on original occurrence of ideas and events. In the beginning, he cited the case of US as an example. The economy of the United States has experienced transformations over the period leading to the enhancement of increased living standards and increment in money flow in the economy. Despite these developments, the economy of the US has continued to experience stagnation in their happiness rate that has remained at 43%. Even today, the US has the same happiness rate. Another example used by the professor is the scrutiny of the people of Japan. During the period of war, the country was devastated, and the economy experienced stagnation in their growth. However, the period after post war was characterized with increased economic growth and increased individual income. Despite all these economic development aspects, the people of Japan have continued to remain unhappy. In this regard, professor Easterlin’s analysis of the derivation holds true. In a broader view, the observation on the majority of wealthy families has revealed that they have more than one car. This ideology can be explained on the basis of combination of consumer behavior and professor Easterlin’s analysis. It is because the marginal utils of derived from cars diminishes as the car gets older. The observation of the law of diminishing returns will enhance the purchase of another car to increase total satisfaction. From the figure below, it is evident that a
dvancement in income leads to an increase in total utility. It is also evident that increase in wealth leads to a gradual decline in marginal utility.

Consumer choice and budget constraint
          The rationality behavior of consumers is enhanced in their quest to satisfy their wants and needs with the use of available budget constraint. In their quest to maximize satisfaction under minimum budget constraint, consumers have developed preferences which help them to limit the amount of spending on goods and services. Consumer behavior states that each consumer has complete awareness of the goods they need and preferences of the products. Because of the budget constraint, consumers aim at spending their money in the purchase of commodities and services that maximizes their utility satisfaction. This ideology is better illustrated with the use of indifference curves highlighting the choices of the consumer in making purchases. The consumer will also always aim at reaching the furthest indifference curve that yields maximum satisfaction.
          In conclusion, the economics of happiness and analysis of the consumer behavior are both beneficial in highlighting derivation of satisfaction and health through the consumption of commodities. Both analyses assert that more wealth does not automatically result in the enhancement of higher satisfaction and happiness. However, the difference between the two aspects lies in the analysis of their view of money. The professor states that happiness is derived from social events with no monetary relevance. On the other hand, consumer behavior relates that happiness is achieved when marginal utility is rising. In the same context, a decline in marginal utility results in a significant decline in satisfaction derived from the commodity.