# Consumer theory

Traditionally social science has tended to regard consumption as a trivial by-product of production. However, sociologists have increasingly come to recognize the value of studying consumer culture for its own sake. Register Demand Much of the preceeding material in the consumer theory section is focused on the relationship between a consumer's preferences and a utility function that represents these preferences. There are two reasons for this emphasis. Preferences are a natural psychological concept. Faced with choice alternatives, it is reasonable to expect that a consumer will be able to rank the alternatives.

But when economists evaluate markets, they would like to have a representation of demand. If preferences are represented by a utility function, then demand can be derived from maximization of utility for various prices and income. In this section, we assume that the consumer has preferences that are represented by a utility function, and we then carry out this derivation of demand.

Once demand is represented by a function, it can be used to develop a model of exchange, and it can be combined with the supply functions of firms to model trade in a market.

Utility functions There are several classes of utility functions that are frequently used to generate demand functions. Each of these utility functions has specific properties and uses which are discussed below after the demand function for each is derived.

Diminishing Marginal Rate of Substitution Each of the utility functions examined below exhibits a property called "diminishing marginal rate of substitution. Figure 10 below demonstrates this idea. The curve in the figure shows a many combinations of commodities X and Y that all result in the same utility.

Combinations of X and Y that produce the same utility level are called an "indifference curve. The marginal rate of substitution MRS going from x1, y1 to x2, y2 is 3, since the consumer is willing to give up 3 units of Y to get one additional unit of X.

The MRS going from x2, y2 to x3, y3 is only 1. This reduction in the marginal rate of substitution is one of the main assumptions about preferences or utility beyond the regularity assumptions that were described in earlier sections.

Diminishing MRS is both an intuitive condition on preferences, and also a mild assumption, but in almost all cases it is enough to guarantee that the demand for a commodity decreases as its price increases.

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The optimal consumption level for each commodity is determined by setting the slope of the indifference curve through a point x, y equal to the slope of the budget line. Figure 11 shows two consumption points, 'a' and 'b'.

At consumption point 'a', the slope of the indifference curve is not equal to the slope of the budget line. Note that at point 'b', the slope of the indifference curve and the budget line are equal, and the utility level is higher than at point 'a'.

Non-optimal consumption point a and optimal point b. The top graph in figure 12 shows three example budget lines and the tangency, with the optimal consumption point for each. Since the price of X for each of the budget lines is different, and the optimal consumption level for X is different in each of the three cases, the relationship between px, the price of X, and the consumption level of X can be traced out.

The lower graph in figure 12 traces out this relationship for a consumer with the indifference curves shown in the top portion of figure The points labeled 'b' and 'c' in both graphs are interpreted similarly.

The points 'a', 'b', and 'c' all lie on the demand graph, which is the bottom graph in figure Optimal consumption points for three different prices top and corresponding demand function bottom. There is an important feature of the Cobb-Douglas utility function that is apparent in this figure.

When the price of X changes, the demand for Y doesn't change. This means that commodities X and Y are neither substitutes for one another nor complements to one another.

Derived demand for Cobb-Douglas utility The graphical derivation of demand described above is useful for understanding what it means to derive demand from a consumer's utility and budget, but an analytical technique is helpful since the demand is then known for many different income levels and for different prices of the other commmodity Y.

The analysis below shows how this is done for the Cobb-Douglas utility function. The simplest way to find the slope of the indifference curve is to use implicit differentiation. Solve this for y' x to get the slope of the indifference curve:Barnett, Fisher, Serletis: Consumer Theory and the Demand for Money There is another problem with this lit- erature, and this is that the studies of.

Global consumer culture is “at one and the same time, ideology and social process, as something continuously made and remade through constantly shifting relations, practices, and technologies” of market mediation (Mazzarella.

Oct 29,  · The consumer theory is a theory in economics that tries to explain the relationship between a consumer's purchasing choices and income. The idea behind consumer theory is that consumers will try to purchase the products that will give them the highest levels of benefit or enjoyment for the amount of money that they can afford to spend.

## BREAKING DOWN 'Consumer Theory'

Income from a Consumer Theory Perspective The simplest way to demonstrate the effects of income on overall consumer choice, from the viewpoint of Consumer Theory, is via an income-consumption curve for a normal good.

CONSUMER THEORY I Consumer theory – deals with how a consumer chooses the best bundle of goods he/she can afford. BUDGET CONSTRAINT To know which bundle of goods a consumer can afford, we have to look into the consumer’s budget constraint. We first assume that there are only two goods, say good x1 and x2.

Consumer theory. In the introduction to these notes we said that the objective of economic theory consists in explaining and predicting economic agents’ behavior.

Unit 2: Consumer Theory | Principles of Microeconomics | Economics | MIT OpenCourseWare