Fairness Cream

CONSUMER PREFERENCES The underlying foundation of demand, therefore, is a model of how consumers behave. The individual consumer has a set of preferences and values whose determination are outside the realm of economics. They are no doubt dependent upon culture, education, and individual tastes, among a plethora of other factors. The measure of these values in this model for a particular good is in terms of the real opportunity cost to the consumer who purchases and consumes the good. If an individual purchases a particular good, then the opportunity cost of that purchase is the forgone goods the consumer could have bought instead. We develop a model in which we map or graphically derive consumer preferences. These are measured in terms of the level of satisfaction the consumer obtains from consuming various combinations or bundles of goods. The consumer’s objective is to choose the bundle of goods which provides the greatest level of satisfaction as they the consumer define it. But consumers are very much constrained in their choices. These constraints are defined by the consumer’s income, and the prices the consumer pays for the goods. We will formally present the model of consumer choice. As we go along, we will establish a vocabulary in order to explain the model. Development of the model will be in three stages. After a formal statement of the consumer’s objectives, we will map the consumer’s preferences. Secondly, we present the consumer’s budget constraint; and lastly, combine the two in order to examine the consumer’s choices of goods. THE THEORY OF THE CONSUMER Consumer make decisions by allocating their scarce income across all possible goods in order to obtain the greatest satisfaction. Formally, we say that consumers maximize their utility subject to budget constraint. Utility is defined as the satisfaction that a consumer derives from the consumption of a good. As noted above, utility’s determinants are decided by a host of noneconomic factors....