Chapter 9 Consumer theory

Publisher Summary The main objective of consumer theory is to determine the impact on observable demands for commodities of alternative assumptions on the objectives, on the behavioral rules of the consumer, and on the constraints that they faces while making a decision. The chapter explains that the traditional model of the consumer takes preferences over alternative bundles to describe the objectives. Commodities can be divided into goods and services. Each commodity is completely specified by its physical characteristics, location, and date at which it is available. In studies of behavior under uncertainty, an additional specification of the characteristics of a commodity relating to the state of nature occurring is added, which leads to the description of a contingent commodity. The behavioral rule consists of maximization of these preferences under a budget restriction, which determines the trading possibilities. The principal results of the theory consist of the qualitative implications on observed demand of changes in the parameters, which determine the decision of the consumer. The historical development of consumer theory indicates a long tradition of interest of economists in the subject, which has undergone substantial conceptual changes over time to reach its present form.

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