If the economical rational behavior is assumed, on the part of households, people tend to make optimal choices subject to their budget constraints. In this view, the choice of energy is based on the individual’s subjective evaluation, and preferences for the type of energy. An individual will choose a certain type of energy if he perceives that the resulting utility gained by making the investment is worth paying the initial cost.
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Another view is that instead of assuming economic rationality, energy preferences of various households are sometimes influenced by other households in the society. In this case, the different utility functions of the households are interdependent. In such a case, energy consumers are unable to make a perfect evaluation of the hypothetical economical alternatives. Making a decision regarding a form of energy to use is also influenced by factors such as the existing habit and knowledge. If the energy consumer considers the cost of energy too high without any budgetary constraints, and without a prior knowledge of any economic benefits, this becomes a first high cost economic barrier. In the same way, if the energy investment is cost-efficient the purchase limited by budget constraints, then the first high cost is the barrier.
The second view recognizes the fact that advertising and other forms of public awareness are important in influencing how consumers choose their investments in energy, even though the extent to which such can work vary from one consumer to another. The disposable income of an individual affects the level of the quantity of energy that may be sold from a given level of advertising expenditure. Advertising take place in a world where information is neither free nor perfect. Advertising informs the consumer about the existence and the various characteristics of a form of energy and also in fluencies their spending behavior not only by persuading them to switch from their current forms of energy, but also to look around for lower prices of energy at a lower cost.
While advertising may increase the market share of a product, it also increases the price elasticity of demand for various forms of energy, so that the higher the price elasticity, the more competitive the market. The danger is when one type of energy is advertised as this gives the advertising company a playing ground to raise prices as in the case of a monopoly. In most cases, forms of energy that are advertised tend to be priced higher than those that are not very well known. The advertising company has an opportunity to influence the consumer to think that the advertised product is of the best quality than the rest. It is of benefit to the society if advertising gives truthful information to consumers about the product quality.
In formation on public understanding enlarges the choices of consumers as far as forms of energy are concerned. Information on efficiency of various forms of energy is scarce, and consumers need help to be able to achieve their rational economic objectives and advance their net social benefits.
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