CONSUMER PREFERENCES

As we mentioned at the outset of this unit, consumer preferences or choices have changed from time-to-time and to understand what accounts for these changes, as well as consumer choice or preferences more generally, it is important to outline several fundamental principles underlying consumer behavior.

We also mentioned that these changes find their reflection through an indifference curve that measures the satisfaction of consumers via utility. Moreover, we, as consumers, have a goal in life, which is to maximize our utility subject to our budget constraint. When we go to the store, we pick the basket that we like best and that stays within our budget. Therefore, this section underlies the basic assumptions that economists make about the nature of the consumer’s tastes or preferences.

1. Preferences are complete: this means that the consumer is able to compare and rank all possible baskets.
2. Consumer’s preferences are transitive.
3. Consumers always prefer more of a commodity to less (i.e., non-satiation).
4. A diminishing marginal rate of substitution (i.e., convexity)

A diminishing marginal rate of substitution is exhibited when indifference curves are convex, and the slope of the indifference curve increases (becomes less negative) as we move down along the curve.