Introduction

Life is like a shopping center. A consumer enters it and sees lots of goods, in various quantities, that she might buy. A consumption bundle, or a bundle for short, is a combination of quantities of the various goods (and services) that are available. For instance, a consumption bundle might be 2 apples, 1 banana, 0 cookies, and 5 diet sodas. We would write this as (2, 1, 0, 5). Of course the consumer prefers some consumption bundles to others; that is, she has tastes or preferences regarding those bundles.

In this chapter we discuss the economic theory of preferences in some detail. We make various assumptions about a consumer's feelings about alternative consumption bundles. We assume that when given a choice between two alternative bundles, the consumer can make a comparison. (This assumption is called completeness.) We assume that when looking at three alternatives, the consumer is rational in the sense that, if she says she likes the first better than the second and the second better than the third, she will also say that she likes the first better than the third. (This is part of what is called transitivity.) We examine other basic assumptions that economists usually make about a consumer's preferences: one says that the consumer prefers more of each good to less (called monotonicity), and another says that a consumer's indifference curves (or sets of equally desirable consumption bundles) have a certain plausible curvature (called convexity).