R14 Demand and Supply Analysis Consumer Demand

CFA® Level I – Economics
Demand and Supply Analysis: Consumer Demand www.irfanullah.co Graphs, charts, tables, examples, and figures are copyright 2012, CFA Institute.
Reproduced and republished with permission from CFA Institute. All rights reserved.
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Contents and Introduction
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3.
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6.

Introduction
Consumer Theory: From Preferences to Demand Functions
Utility Theory: Modelling Preferences and Tastes
The Opportunity Set: Consumption Production, and Investment Choice
Consumer Equilibrium: Maximizing Utility Subject to the Budget Constraint
Revisiting the Consumer’s Demand Function

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2. Consumer Theory: From Preferences to Demand Functions
Consumer choice theory relates consumer demand curves to consumer preferences and constraints; it considers a consumer’s
 Preferences and willingness to tradeoff between two goods
 Budget constraints

What consumer would like to do
What
consumer would do

What consumer can do

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3. Utility Theory: Modelling Preferences and Tastes
1. Axioms of the Theory of Consumer Choice
2. Representing Consumer Preference: The Utility Function
3. Indifference Curves
4. Gains from Voluntary Exchange: Creating Wealth through Trade

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3.1 Axioms of Consumer Choice Theory
Consumption bundle or basket: combination of goods and services a consumer would like to consume; same goods but different quantities means different bundle

Axiom is an assumption which is assumed to be true
Complete
Preferences
(Completeness)

Transitive
Preferences
(Transitivity)

Non-Satiation

Example 1 www.irfanullah.co 5

3.2 Representing the Preference of a Consumer:
The Utility Function
The utility function is a rule which translates the quantities of goods in each basket into a utility number (utils)
This number is a measure of happiness and is based on an ordinal scale
General case: U = f (Qx1, Qx2,…..Qx3 )
Specific example: say we have milk and bread…
U = f(M, B) = MB

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