5.5:
The Consumer Preferences II
The study of consumer behavior is based on a few assumptions regarding consumer preferences.
The assumption of transitivity means that a customer's preferences are logically consistent. For example, consider three cars. Car A is a sports car, Car B is an SUV, and Car C is a sedan.
John prefers Car A over Car B. Also, he prefers Car B over Car C. By the transitivity principle, John should prefer Car A over Car C.
It is also assumed that as consumers accumulate more of a specific good, their willingness to give up another good to acquire even more of those particular good decreases.
For example, John loves to collect books. As he accumulates books, his willingness to give up another good, such as new clothes, to get one more book decreases.
This rate at which a person is willing to trade one good for another is called the Marginal Rate of Substitution, or MRS.
These assumptions, along with others like continuity of preferences, help economists model and understand consumer behavior, forming the basis for demand analysis and other areas of microeconomic theory.
5.5 The Consumer Preferences II
Assumptions about Consumer Preferences
Two assumptions about consumer preferences were explained in the previous lesson. The remaining two are explained below.
Transitivity
It means that a consumer's preferences are consistent across different market baskets. For example, a consumer prefers Basket A over Basket B and Basket B over Basket C. It is expected that the same consumer would prefer Basket A over Basket C. This can be symbolically represented as
If A ≻ B and B ≻ C, then A ≻ C.
As consumers accumulate more of a specific good, their willingness to sacrifice another item to acquire even more of those particular goods decreases.
The rate at which a person is willing to trade one good for another is called the Marginal Rate of Substitution, or MRS. A consumer's willingness to trade one good for another changes as they acquire more of a good.
The marginal rate of substitution (MRS) is the ratio of the quantity of one good the consumer is willing to give up to acquire one more unit of another good. For example, when the consumer initially has one burger and a plate full of cookies, she may be willing to give up three of her cookies to receive an additional burger. The ratio of MRS is three cookies to one burger.
If she would like an additional burger after she already has two, she will likely value having a third burger less than the second burger. This implies that she may be willing to only give up two cookies to receive a third burger. Therefore, the number of cookies that she is willing to sacrifice to attain one more burger falls as she acquires more burgers.
This is an example of a diminishing marginal rate of substitution: the MRS of a good tends to fall as the consumer attains more and more units of that good.