Economics Behind the Demand Curve
Supplement to Unit - II
BEHIND THE DEMAND CURVE: THE THEORY OF CONSUMER CHOICE
Here, the purpose is to explain the derivation of the demand function and to provide an understanding of the consumer decision-making process.
Consumer Preferences Individuals make choices based on their personal tastes and preferences. Tastes and preferences are shaped by many factors. Some of the factors are family environment, physical condition, age, sex, education, religion, and location. In the analysis that follows, tastes and preferences will be viewed as a given, and discussion will focus on how those tastes and preferences are transformed into consumption decisions.
Bundle B
2 units of X
6 units of Y
Bundle A
5 units of X
2 units of Y In the well-established tradition of economics, four basic assumptions are made developing the theory of consumer choice. First, it is assumed that individuals can rank their preferences for alternative bundles of goods and services. Consider a world in which only two goods X and Y are available. Suppose that a consumer is confronted with the following combinations of those two goods:
Bundle C
4 units of X
4 units of Y
The ability to rank means that the individual can assess the relative amount of satisfaction that would result from each bundle of goods. For example, suppose that B is considered the most desirable bundle, and that C and A are viewed as providing equal but lesser amount of satisfaction than B. Using the terminology of the theory of consumer choice, it is said that B is preferred to both C and A, and that the consumer is indifferent between C and A.
Bundle D
3 units of X
7 units of Y The second assumption is non-satiation. This means that individuals consider themselves better off if they have more of a good or service than if they have less. Consider bundle D that consist of
The non-satiation assumption implies that this bundle would be preferred to bundle B because it includes more X and more Y.
BEHIND THE DEMAND CURVE: THE THEORY OF CONSUMER CHOICE
Here, the purpose is to explain the derivation of the demand function and to provide an understanding of the consumer decision-making process.
Consumer Preferences Individuals make choices based on their personal tastes and preferences. Tastes and preferences are shaped by many factors. Some of the factors are family environment, physical condition, age, sex, education, religion, and location. In the analysis that follows, tastes and preferences will be viewed as a given, and discussion will focus on how those tastes and preferences are transformed into consumption decisions.
Bundle B
2 units of X
6 units of Y
Bundle A
5 units of X
2 units of Y In the well-established tradition of economics, four basic assumptions are made developing the theory of consumer choice. First, it is assumed that individuals can rank their preferences for alternative bundles of goods and services. Consider a world in which only two goods X and Y are available. Suppose that a consumer is confronted with the following combinations of those two goods:
Bundle C
4 units of X
4 units of Y
The ability to rank means that the individual can assess the relative amount of satisfaction that would result from each bundle of goods. For example, suppose that B is considered the most desirable bundle, and that C and A are viewed as providing equal but lesser amount of satisfaction than B. Using the terminology of the theory of consumer choice, it is said that B is preferred to both C and A, and that the consumer is indifferent between C and A.
Bundle D
3 units of X
7 units of Y The second assumption is non-satiation. This means that individuals consider themselves better off if they have more of a good or service than if they have less. Consider bundle D that consist of
The non-satiation assumption implies that this bundle would be preferred to bundle B because it includes more X and more Y.