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Essay on Consumer Economics
The Consumer choice model has four elements, which describe both the consumer and the market environment:
1 The consumer’s income
- The prices at which goods can be bought
- The consumer’s tastes, which rank different bundles of goods by the satisfaction they yield
- The behavioral assumption that consumers do the best they can for themselves. Of the affordable consumption bundles, the consumer picks the bundles that maximize her own satisfaction.
Each of these elements in the model requires detailed discussion.
The budget constraint:
Together, element (1) and (2) define the consumer’s budget constraint.
The budget constraint describes the different bundles that the consumer can afford.
Which bundles are feasible, or can be afforded, depends on f: the consumer’s income and the prices of different goods.
Consider a student with a weekly budget (income, allowance, or grant) of $50 which can be spent on meals or films. Each meal costs $5 and each film $10. What combination of meals and films can she afford? Completely going without films, she can spend $50 on 10 meals at $5 each. Completely going without meals, she can buy 5 cinema tickets at $10 each, Between these two extremes lies a range of combinations of meals and films that together cost exactly $50. These combinations are called the budget constraint.
The budget constraint shows the maximum affordable quantity of one good given the quantity of the other good being purchased.
The budget line summarized the market environment (income and prices) of the consumer. We now consider the consumer’s tastes. We make three assumptions that seem rather plausible, first, the consumer can rank alternative bundles of goods according to the satisfaction or utility they provide. It is unnecessary to quantity this utility, for example to decide that one bundle yields twice as much utility as another bundle.....
