utility
A CONSUMER’S CONSTRAINED CHOICE
Summary
Economists almost always assume that consumers are rational maximizers. This chapter spells out the characteristics of rational maximizing consumers and develops a set of tools to analyze their decision-making process.
People are complex and their preferences differ dramatically, but economists make three simplifying assumptions that seem consistent with consumer behavior. We assume that preferences are complete and transitive, and that more is better. The first two assumptions reflect a broader belief that consumers are rational—that they make logically consistent decisions. Completeness means that, when faced with a choice between any two bundles of goods, a consumer can rank them so that the consumer prefers the first bundle to the second, prefers the second to the first, or is indifferent between them. (Being indifferent means that the two are valued equally.) Transitivity means that if a consumer prefers Bundle A to Bundle B and prefers Bundle B to Bundle C, then the consumer prefers Bundle A to Bundle C. These three assumptions are not always correct, but they adequately describe most people and most ordinary choices. More is better (or nonsatiation) means that for economic goods, consumers always receive some happiness from more, or at least can freely dispose of any excess (if more is not preferred to less, the good is an economic bad). Two more mathematical properties of preferences are continuity and strict convexity. Continuity is similar to transitivity and ensures that consumers don’t change preferences in response to very small changes in bundles. Strict convexity means that consumers prefer averages to extremes, and again is a technical condition that simplifies the mathematics of consumer optimization.
A utility function converts a consumption bundle into a number that can be used for the purpose of ranking. A person receives a higher level of satisfaction (or utility) when consumption of
Summary
Economists almost always assume that consumers are rational maximizers. This chapter spells out the characteristics of rational maximizing consumers and develops a set of tools to analyze their decision-making process.
People are complex and their preferences differ dramatically, but economists make three simplifying assumptions that seem consistent with consumer behavior. We assume that preferences are complete and transitive, and that more is better. The first two assumptions reflect a broader belief that consumers are rational—that they make logically consistent decisions. Completeness means that, when faced with a choice between any two bundles of goods, a consumer can rank them so that the consumer prefers the first bundle to the second, prefers the second to the first, or is indifferent between them. (Being indifferent means that the two are valued equally.) Transitivity means that if a consumer prefers Bundle A to Bundle B and prefers Bundle B to Bundle C, then the consumer prefers Bundle A to Bundle C. These three assumptions are not always correct, but they adequately describe most people and most ordinary choices. More is better (or nonsatiation) means that for economic goods, consumers always receive some happiness from more, or at least can freely dispose of any excess (if more is not preferred to less, the good is an economic bad). Two more mathematical properties of preferences are continuity and strict convexity. Continuity is similar to transitivity and ensures that consumers don’t change preferences in response to very small changes in bundles. Strict convexity means that consumers prefer averages to extremes, and again is a technical condition that simplifies the mathematics of consumer optimization.
A utility function converts a consumption bundle into a number that can be used for the purpose of ranking. A person receives a higher level of satisfaction (or utility) when consumption of