CONSUMER PREFERENCES
The underlying foundation of demand, therefore, is a model of how consumers behave. The
individual consumer has a set of preferences and values whose determination are outside the
realm of economics. They are no doubt dependent upon culture, education, and individual tastes,
among a plethora of other factors. The measure of these values in this model for a particular
good is in terms of the real opportunity cost to the consumer who purchases and consumes the
good. If an individual purchases a particular good, then the opportunity cost of that purchase is
the forgone goods the consumer could have bought instead.
We develop a model in which we map or graphically derive consumer preferences. These are
measured in terms of the level of satisfaction the consumer obtains from consuming various
combinations or bundles of goods. The consumer’s objective is to choose the bundle of goods
which provides the greatest level of satisfaction as they the consumer define it. But consumers
are very much constrained in their choices. These constraints are defined by the consumer’s
income, and the prices the consumer pays for the goods.
We will formally present the model of consumer choice. As we go along, we will establish a
vocabulary in order to explain the model. Development of the model will be in three stages.
After a formal statement of the consumer’s objectives, we will map the consumer’s preferences.
Secondly, we present the consumer’s budget constraint; and lastly, combine the two in order to
examine the consumer’s choices of goods