Consumer Sovereignty in Economics

Consumer Sovereignty is the willingness, ability and freedom of the consumer to largely influence the fundamental economic decisions of resource allocation. The consumer‟s willingness and ability to spend on goods and services is an indication to producers (firms) of what, how and for whom to produce through resource allocation and relocation (reallocation). The consumer exercises this power of influence and determination through price mechanism, such that what is produced is what consumers want and for which they are willing and able to pay a price. To the extent that consumers want and are able to pay for a particular commodity, they will compete with each other and bid up the price relative to other goods. Profit motivated firms will take the rising prices which result from this activity as a signal that it will pay them to reallocate their productive resources to begin or to increase the production of that commodity. Falling prices arising from a change in the conditions of demand will signal to producers that less is required and firms will take appropriate action to cut back on production. Thus, although firms make decisions on what, how and for whom to produce, it is only in response to consumers‟ effective demand through a price bidding process, and so the consumer is said to be sovereign