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Fenster schliessen

theory of consumer behavior

Description of how consumers allocate incomes among different goods and

services to maximize their well-being.

Fenster schliessen

3 steps of consumer behavior

1. Consumer preferences

2. Budget constraints

3. Consumer choices

Fenster schliessen

market basket

List with specific quantities

of one or more goods.

Fenster schliessen

3 assumptions of consumer preferences

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.

Fenster schliessen

indifference curve

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

Fenster schliessen

indifference map

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

Fenster schliessen

marginal rate of substitution (MRS)

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)

Fenster schliessen

perfect substitutes

Two goods for which the marginal rate

of substitution of one for the other is a constant.