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Unformatted text preview: Chapter 9 Consumer Demand Preparation. The topics covered in this lecture note are: Consumption bundle. Budget constraint. Budget set. Consumer preferences. Rational choice. Utility. Marginal utility. Consumer demand. Consult the index of your textbook and review what your book has to say about these topics before coming to class. Motivation. This note explores how economists model the details of the demand side of a market. The place to start is the word demand . What is meant by the statement that a consumer demands something? It simply means that this thing is what the consumer has selected for consumption. Think of the last time you bought an item in a store. You went into the store, selected your item and then traded some other item (usually money) for it. When you did this you let the store know your demand. So the main question that has to be answered if we are to understand the demand side of a market is How does a consumer choose what to demand? How do you explain the consumption choices that you make? Think about it. Go on take a few moments and think seriously about how you decide what you will consume. When you are ready, move along to the next paragraph. 213 214 CHAPTER 9. CONSUMER DEMAND Probably your answer is something like I choose to consume what I most prefer to consume from the choices available to me. For example, think seriously about choosing between consuming (a) one can of Diet Pepsi and one toasted cheese sand- wich, or (b) two cans of Diet Pepsi and no sandwich. Either bundle (a) or bundle (b), but not both, will be given to you as soon as you say which one you choose. Most of us will select the alternative, (a) or (b), that we most prefer at this moment. It is for this reason that economists typically model a consumers choice over consumption al- ternatives as being the most preferred of the alternatives that are currently available to the consumer. Economists say that such choices are RATIONAL . So how are rational choices made? This process must have two parts to it. First, a consumer can select only from the consumption choices that are available to her. This is why we will have to consider what restricts the consumers choices. Second, the consumer must know her preferences over the consumption choices that are available to her for, if not, then how can she make a most preferred choice? In what follows you will see that combining these two parts creates a plausible explanation of consumers demands. Consumption Bundles. Think of a list of items that you might consume. An example is 3 sandwiches and 1 cookie. If we know the order in which we list these commodities ( e.g. the quantity of sandwiches first, then the quantity of cookies second) then we could equally well write this list as just (3 , 1) because we would then know that 3 is the number of sandwiches and that 1 is the number of cookies....
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