Theory of Consumer Preferences
Consumer preferences are defined as the subjective (individual) tastes, as measured by utility, of
various bundles of goods. They permit the consumer to rank these bundles of goods according to
the levels of utility they give the consumer. Note that preferences are independent of income and
prices. Ability to purchase goods does not determine a consumer’s likes or dislikes. One can
have a preference for Porsches over Fords but only have the financial means to drive a Ford.
These preferences can be modeled and mapped through the use of indifference curves. In order
to graphically portray consumer preferences, we need to define some terms. First, since we will
be working in two dimensions (2-d graphs), we assume a two good world. These could be any