1.

The Theory of Consumer Choice:

1.1. Definition:

1.1.1. The Budget Constraint:

A consumer’s budget constraint shows the possible combinations of different goods

he can buy given his income and the prices of the goods. The slope of the budget

constraint equals the relative price of the goods.

1.1.2. Preferences:

The consumer’s indifference curves represent his preferences. An indifference curve

shows the various bundles of goods that make the consumer equally happy. Points on

higher indifference curves are preferred to points on lower indifference curves. The

slope of an indifference curve at any point is the consumer’s marginal rate of

substitution—the rate at which the consumer is willing to trade one good for the other.

1.1.3. Indifference curve:

A consumer's preferences can be illustrated through the concept of indifference

curves. An indifference curve is a line on a graph made up of all combinations of

baskets of goods that give the same satisfaction to a consumer.

At all points on the same indifference curve, the consumer does not make any

distinction between baskets of goods.

1.1.4. Optimization:

The consumer optimizes by choosing the point on his budget constraint that lies on

the highest indifference curve. At this point, the slope of the indifference curve (the

marginal rate of substitution between the goods) equals the slope of the budget

constraint (the relative price of the goods).

1.2. Factors that affect theory of consumer choice

Factors associated with the purchasing power of the consumers affect the choices of

the consumer:

1.2.1. Substitution effect:

When the price of a good falls, it becomes comparatively cheaper than another good,

which instigates customers to replace goods that are relatively expensive for goods

whose price has been decreased now. As a result of this, the aggregate demand of the

good whose price has been reduced, increases and vice versa. This is known as the

substitution effect, which arises due to the inherent tendency of consumers to

substitute relatively expensive for cheaper goods ones, after eliminating the real

income effect of price change.

1.2.2. Income effect:

When there is a decrease in the price of a good or service, the consumer will be able

to buy more quantity with the same amount of money or the same quantity with less

amount of money. In this way, the overall purchasing power of the consumer

increases, which induces them to buy more of that commodity whose price has

decreased, increases. The inverse is also true, any increase in the price of a good or

service will result in a fall in consumption, due to income effect.

1.3. Applying the theory of consumer behavior analysis:

Analyzing consumer behavior helps answer questions such as how changes in income

and prices affect the demand for goods and services. How will consumers choose

goods within their limited income?

Analyze consumer behavior sequentially in three steps:

 First, the definition of consumer preferences. It is a clear explaination of how

consumers prefer one product over another. From there, businesses try to find and

promote their competitive advantages compared to competitors in the market.

 Second, consider how consumers exhibit their behavior in response to budget

constraints. A consumer's income constraint controls how much of a good the

consumer can afford to buy. Businesses rely on the above research to come up

with pricing policies suitable for their target customers.

 Third, with the combination of preferences and budget constraints, the consumer's

optimal choice will be determined to maximize his or her preferences within the

allowed budget limit.

2. Analytical techniques:

2.1. SWOT analysis:

This is an analytical technique commonly used in environmental research. The

S.W.O.T technique is qualitative, depending on the ability and experience of the

analyst; is a method of linking environmental factors to determine appropriate options

(possible scenarios).

The sequence of technical steps for S.W.O.T matrix analysis includes:

Step 1: List the factors on the matrix

Step 2: Provide options: SO, ST, WO, WT

Step 3: Combine options to build a scenario

Step 4: Choose a scenario and build a strategy

Illustration of the S.W.O.T tool is shown as shown below:

2.2. Porter's Five Forces analysis:

As well as SWOT analysis, we will use Porter’s Five Forces analysis to have a clearer

vision of TH True Milk.

The Five Forces Model is a model that identifies and analyzes the five competitive

forces that shape every industry and helps identify industry strengths and weaknesses.

Michael E. Porter is a professor at Harvard Business School, he is the father of the 5

competitive forces model.

Michael Porter's 5 competitive forces model includes: old competitors, new

competitors, power of suppliers, power of customers, buyers, threat of substitute

products. The 5 Forces model is widely applied, forcing companies to look beyond

their own current business and the entire industry when planning long-term

development for the company.

Illustration of the Porter’s Five Forces tool is shown as shown below: