Consumer Theory
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Consumer Theory
Where does the demand curve come from?
In order to explain why individuals choose different quantities at different prices, we will use a model with three components:
1- Consumers have certain restrictions on how they can choose. Most importantly, they have a budget, but there can also be other restrictions.
2- Individual preferences (or tastes) determine how satisfied an individual will be with different combinations of goods and/or services. We measure the level of satisfaction in terms of utility.
3- Given preferences and restrictions, the individual maximizes her utility of consumption.
Baskets of Goods and the Budget Line
Theory of Preferences
Indifference Curves
Indifference Maps
Marginal Rate of Substitution
Indifference Curves for Perfect Substitutes and Complementary Goods
Utility Maximization