5.4:
The Consumer Preferences I
Consumer preferences are based on a few assumptions that help simplify consumer behavior.
A market basket or a bundle refers to a combination of goods and services a consumer can purchase, such as food, clothing, and entertainment.
The completeness assumption states that a consumer can compare and rank two or more baskets. This allows for consistent decision-making in economic models.
For example, Nicole is considering two baskets. Basket A has an expensive smartphone with standard earbuds. Basket B contains a mid-range smartphone with premium earbuds.
With the completeness assumption, Nicole can rank these options: she may prefer Basket A over Basket B, favor Basket B over A, or be indifferent between the two.
The assumption of monotonic preference implies that a consumer considers an increase in consumption better. It means a consumer prefers to have more of something rather than less.
For example, Nicole highly values vacation days. She is considering two jobs, if Job A offers 20 vacation days and a $50,000 salary, while Job B offers 30 vacation days and a $55,000 salary, monotonic preferences would imply Nicole chooses Job B, as it offers more of both goods.
5.4 The Consumer Preferences I
Consumer Preferences
The cardinal approach of utility uses an imaginary measure of satisfaction, utils. In the ordinal approach, consumer preferences refer to the ranking a consumer makes between different product bundles or baskets. A market basket is a collection of products a consumer can purchase. Two goods are taken in a basket to explain consumer preferences. For example, a market basket could have coffee and sandwiches.
Assumptions about Consumer Preferences
The following assumptions are made:
- Completeness.
- Monotonic preferences or more is better.
- Transitivity.
- As consumers accumulate more of a specific good, their willingness to sacrifice another item to acquire even more of those particular goods decreases.
Completeness
It means that consumers can compare and rank all possible combinations of products, known as baskets. A consumer can definitively state their preference for any two baskets, say A and B. They might prefer basket A over B, B over A, or view them as equally desirable.
Monotonic Preferences or More is Better
It means that consumers prefer more of any good to less. For instance, if a consumer is comparing baskets of goods, under the monotonic preferences assumption, they would always prefer the basket with more quantity.