Consumer Theory
Consumer theory is a branch of microeconomics that studies how individuals make
decisions to allocate their limited resources among various goods and services to
maximize their utility or satisfaction.
Preferences and Utility
Preferences:
- Preferences describe how consumers rank different bundles of goods according to
their levels of satisfaction. Preferences are assumed to be complete (consumers can
rank all possible bundles), transitive (if bundle A is preferred to bundle B and bundle
B to bundle C, then bundle A is preferred to bundle C), and non-satiated (more is
always preferred to less).
Utility:
- Utility is a measure of satisfaction or happiness that a consumer derives from
consuming goods and services. It is a way to quantify preferences. Utility can be
represented as a utility function, U(X, Y), where \( X ) and ( Y ) are quantities of two
goods.
Types of Utility:
Cardinal Utility:Assumes that utility can be measured in absolute units.
Ordinal Utility:Assumes that utility can only be ranked in order of preference but
not measured in absolute terms.
Indifference Curves:
- Indifference curves represent combinations of two goods that provide the
consumer with the same level of utility. The curves are typically downward sloping,
indicating a trade-off between goods. Higher indifference curves represent higher
utility levels. The slope of an indifference curve at any point is called the marginal
rate of substitution (MRS), showing the rate at which a consumer is willing to
substitute one good for another while maintaining the same level of satisfaction.
Budget Constraints
Consumer theory is a branch of microeconomics that studies how individuals make
decisions to allocate their limited resources among various goods and services to
maximize their utility or satisfaction.
Preferences and Utility
Preferences:
- Preferences describe how consumers rank different bundles of goods according to
their levels of satisfaction. Preferences are assumed to be complete (consumers can
rank all possible bundles), transitive (if bundle A is preferred to bundle B and bundle
B to bundle C, then bundle A is preferred to bundle C), and non-satiated (more is
always preferred to less).
Utility:
- Utility is a measure of satisfaction or happiness that a consumer derives from
consuming goods and services. It is a way to quantify preferences. Utility can be
represented as a utility function, U(X, Y), where \( X ) and ( Y ) are quantities of two
goods.
Types of Utility:
Cardinal Utility:Assumes that utility can be measured in absolute units.
Ordinal Utility:Assumes that utility can only be ranked in order of preference but
not measured in absolute terms.
Indifference Curves:
- Indifference curves represent combinations of two goods that provide the
consumer with the same level of utility. The curves are typically downward sloping,
indicating a trade-off between goods. Higher indifference curves represent higher
utility levels. The slope of an indifference curve at any point is called the marginal
rate of substitution (MRS), showing the rate at which a consumer is willing to
substitute one good for another while maintaining the same level of satisfaction.
Budget Constraints
