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What is Time Preference?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 December 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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Time preference is an economic theory that has to do with what influences consumers to either expedite or delay the purchase of different goods and services. The idea is to determine which factors would motivate a consumer to move forward with a purchase as the means of generating satisfaction, and which events would have to occur in order for the consumer to see delaying or even foregoing the purchase as a better way to achieve satisfaction. All sorts of factors may be included in the assessment, including the use of discounting to motivate consumption and the role of interest rates in both prompting or delaying a purchase.

The basics theory of time preference was developed by an Austrian economist, Carl Menger, in the latter part of the 19th century. As part of the overall approach, the theory holds that as the consumer perceives the benefits associated with a purchase increasing, motivation to make the purchase is increased. Should the consumer perceive less benefit from the purchase, interest will wane and it will either take longer for the purchase to occur or the purchase will not take place at all. Assuming a purchase does take place, it will occur when and as the consumer is ready, and not before.

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An example of time preference in action would involve the purchase of a new laptop computer. If the consumer currently has a working model that he or she would like to replace at some point in the future, the urgency to replace now rather than later may be decreased by factors such as other debts to settle first or concerns about the retail cost of the new computer. Speculation that newer operating systems with additional features will soon be released may also prompt the consumer to wait rather than move forward with a purchase now.

Several factors could occur to alter the time preference of the consumer. For instance, the current laptop could fail, making the need to replace the unit more urgent. A significant discount on the purchase price may also be enough of a benefit to prompt the consumer to purchase the new laptop now rather than waiting. If the newer machine includes software or other features that are of particular interest to the consumer, these may serve as the basis for moving ahead with the purchase.

Understanding the idea of time preference helps manufacturers as well as retailers have some idea of which factors could motivate interest in their products and lead to sales occurring sooner than later. By tapping into the factors that build interest on the part of consumers, salespeople make it possible to generate additional sales in a shorter period of time. This in turn means more revenue for the company and the opportunity to expand the client base, helping to increase the chances of the company remaining in business for a longer period of time.

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