Microeconomics – Consumer Behaviour

Description of how consumers allocate incomes among different goods and services to maximize their wellbeing.
Understood in 3 distinct steps:
1. Consumer preferences
2. Budget constraints
3. Budget choices

List with specific quantities of one or more goods.

Preferences are assumed to be complete. Consumers can compare and rank all possible baskets. Thus, for any 2 market baskets, A and B, a consumer will prefer A to B, or will be indifferent between the two (equally satisfied with either basket).
A > B.
These preferences ignore costs.

Preferences are transitive. Transitivity means that is a consumer prefers basket A to basket B and basket B to basket C, then the consumer will also prefer A to C. Transivity is normally regarded as necessary for consumer consistency
A>B>C

Goods are assumed to be desirable (good). Consequently, consumers always prefer more of any good to less. In addition, consumers are never satisfied or satiated (more is better, even a little). This assumption is made for pedagogic reasons. It sumplifies the graphical analysis.
Some goods are undesirable (pollution). We ignore these "bads" in this immediate context.

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

Graph containing a set of indifference curves showing the market baskets among which the consumer is indifferent.
If indifference curves intersect, one of the assumptions of consumer theory is violated.

Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.
The magnitude of the slope of an indifference curve measures the consumer's marginal rate of substitution (MRS) between two goods.
Convexity - The decline in the MRS reflects a diminishing rate of substitution. When the MRS diminishes along an indifference curve, the curve diminishes along an indifference curve, the curve is convex.

Two goods for which the MRS of one for the other is a constant.

Two goods for which the MRS is infinite; the indifference curves are shaped as right angles. An additional unit gives no extra satisfaction unless an item of the other good is provided.

Good for which less is preferred rather than more

Numerical score representing the satisfaction that a consumer gets from a given market basket i.e. a numerical score to each indifference curve

Formula that assigns a level of utility to individual market baskets.

Utility function that generates a ranking of market baskets in order of most to least preferred.

Utility function describing by how much one market basket is preferred to another.

Constraints that consumers face as a result of limited incomes

All combinations of goods for which the total amount of money spent is equal to income.