Fourth lecture

Consumer Theory

Consumer theory is a theory of microeconomics that relates preferences to consumer demand curves. The link between personal preferences, consumption, and the demand curve is one of the most complex relations in economics. Implicitly, economists assume that anything purchased will be consumed, unless the purchase is for a productive activity.

Preferences are the desires by each individual for the consumption of goods and services, and ultimately translate into employment choices based on abilities and the use of the income from employment for purchases of goods and services to be combined with the consumer's time to define consumption activities.

Consumption is separated from production, logically, because two different consumers are involved. In the first case consumption is by the primary individual; in the second case, a producer might make something that he would not consume himself. Therefore, different motivations and abilities are involved.

The models that make up consumer theory are used to represent prospectively observable demand patterns for an individual buyer on the hypothesis of constrained optimization.

Prominent variables used to explain the rate at which the good is purchased (demanded) are the price per unit of that good, prices of related goods, and wealth of the consumer.

The fundamental theorem of demand states that the rate of consumption falls as the price of the good rises. In addition, as the wealth of the individual rises, demand increases, shifting the demand curve higher at all rates of consumption. The first is called the substitution effect and the second the income effect.

As prices rise, consumers will substitute away from higher priced goods and services, choosing less costly alternatives.

Consumer theory I

Consumer theory II

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Indifference curves (videos)

Indifference Curves (1 of 3) by Richard McKenzie

Indifference Curves (2 of 3) by Richard McKenzie

Indifference Curves (3 of 3) by Richard McKenzie