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Consumer Sovereignty Explained

Quick Definition: Consumer sovereignty is a term used to describe how consumers have ultimate control over what is produced in an economy.

What is consumer sovereignty?

In his 1936 book, Economists and the Public, an economist called William Harold Hutt mentions the term ‘consumer sovereignty. What does this phrase actually mean?

Consumer sovereignty is basically a phrase to describe the power consumers (the people who buy goods and services) have over what is produced in an economy. You may think it is firms that have ultimate control over what goods and services are produced but actually consumers have a lot more power than you think.

Consumers are the people who purchase goods and services. If a firm makes a new product and lots of people start purchasing it, more and more firms will start making the same product because it is profitable to do so – firms are basically following the orders of the consumer to make this product. On the other hand, if a firm makes a product and no one buys it, this product will stop being made – in other words, firms are following the orders of the consumer to not make this product because nobody wants it.

Let’s use an example to make this clearer. Let’s say there are two firms: one firm makes red cars and the other firm makes blue cars. The firm who makes blue cars sells thousands of his cars a year and makes a lot of profit. Other firms see how much profit this firm is making and also start making blue cars and also make lots of profit. On the other hand, the firm who makes red cars only sells a few hundred a year and is making a loss. After a while, the firm making red cars goes out of business. From this example the consumers have basically decided two things: they like blue cars and they want them to be produced and they don’t like red cars and they don’t want them to be produced.

Key terms

  • Economy – A system that provides goods and services.
  • Free market economy – An economy where activity is directed by entrepreneurs and private organisations with little intervention from the state.
  • Invisible hand – An expression coined by the economist Adam Smith which was used as an analogy to show that when people acted selfishly and bought products that they wanted, society on the whole would be better off because only the goods and services that people wanted would be produced as firms would only produce goods that are profitable. Therefore when people act in their own self-interest they are actually acting in the most socially optimal way – as if guided by an invisible hand.
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