Microeconomics 3

Description of how consumers allocate incomes among different goods and

services to maximize their well-being.

1. Consumer preferences

2. Budget constraints

3. Consumer choices

List with specific quantities

of one or more goods.

1. Completeness: Preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets. Thus, for any two market baskets A and B, a consumer will prefer A to B, will prefer B to A, or will be indifferent between the two. By indifferent we mean that a person will be equally satisfied with either basket.

2. Transitivity: Preferences are transitive. Transitivity means that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. Transitivity is normally regarded as necessary for consumer consistency.

3. More is better than less: Goods are assumed to be

desirable—i.e., to be good. Consequently, consumers always

prefer more of any good to less. In addition, consumers are

never satisfied or satiated; more is always better, even if just a

little better.

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent

Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good. (slope of indifference curve)

Two goods for which the marginal rate

of substitution of one for the other is a constant.