CONSUMER PREFERENCE AND CHOICE

OVERVIEW

 A consumer is an individual or a household composed of one or more individuals.

 The consumer is the basic economic unit that determines which commodities are purchased and in what quantities.
 We begin the study of the economic behavior of consumer by examining tastes.
 Because the consumers’ wants are unlimited or in any event exceeds his or her ability to satisfy them all it is
important that consumer spend income so as to maximize satisfaction.
TOTAL AND MARGINAL UTILITY

 The property of a good that enables it to satisfy human wants is called utility. 
 as individuals consume more of a good in a time period, their total utility of satisfaction increases but their
marginal utility diminishes.
 Marginal utility is the extra utility received from consuming one additional unit of good per unit of time while
holding constant the quantity consumed of all other commodities.
TOTAL AND MARGINAL UTILITY TABLE

Qx Tux MUx
0 0 ----
1 10 10
2 16 6
3 20 4
4 22 2
5 22 0
6 20 -2
 TOTAL AND MARGINAL UTILITY

25
----
10
22 22 ----
20
20 20

marginal utility of X
Total utility of X

15 16

10
10 2

0
5 1 2 3 4 5 6

-2
0
0
1 2 3 4 5 6 7
quantity of x
Quantity of X
CARDINAL VERSUS ORDINAL UTILITY

 Cardinal utility means that an individual can attach specific values or number of utils from consuming each
quantity of goods or basket of goods.  in the table we saw that the individual received 10 you utils from
consuming one hamburger. He received 16 utils or six additional utils from consuming two hamburgers.  the
consumption of the third hamburger gave the individual for extra util or two third as many as extra utils as the
second hamburger.  thus these table and figure reflect Cardinal utility.
 In contrast ordinal utility only ranks the utility received from consuming various amounts of a good or basket of
goods. Ordinal utility specifies that consuming two hamburgers gives the individual more utility than when
consuming one hamburger but it does not specify exactly how much additional utilities  the second hamburger
provides
INDIFFERENCE CURVE

 an ordinal measure of utility is based on   three assumptions.

  First,  we assumed that when faced with any two basket of goods, the consumer can determine whether he or she
prefers basket A to basket B or B to A is or whether he or she is indifferent between the two..
  second, We assume that the taste of consumer are consistent or transitive.  that is,  if the consumer states that he
or she prefers basket A to Basket B e and also he or she prefers basket B to Basket C then that consumer will
prefer A to C.
 Third,  we assume that more of a commodity is preferred to less.

 in order to conduct the analysis, we will  throughout that there are only two goods X and Y
 INDIFFERENCE CURVE

 An indifference curve shows the various combinations of two goods that gives the consumer equal utility or
satisfaction.  higher indifference curve refers to higher level of satisfaction and a lower indifference curve refers to
less satisfaction.

hamburgers Soft drinks combination Indifference Curve

12

1 10 A 10 A
8
2 6 B

soft drinks
6 B
4 C
4 3 C
2
F
7 1 F 0
0 1 2 3 4 5 6 7 8

hamburgers
CHARACTERISTICS OF INDIFFERENCE CURVE

 Negatively sloped
 Can’t intersect
 Convex to the origin