Introduction to Consumer Theory

Consumer theory is the branch of economics that studies how consumers allocate their limited resources among different possible goods, services, and activities. It is concerned with understanding how consumers, given their preferences and budget constraints, make decisions about what to buy and how much of it to buy. It is also interested in investigating how different factors, such as income, prices, and tastes, influence consumer decisions.

Utility Theory

The foundation of consumer theory is utility theory, which states that people make decisions that maximize their utility, or satisfaction. Utility is a measure of satisfaction derived from consuming a good or service. Utility is subjective, meaning that it may vary from person to person. Utility theory states that people will purchase more of a good or service as long as the marginal utility, or the extra satisfaction from consuming an additional unit, is greater than the price.

Demand Curve

The demand curve is a graphical representation of how the quantity of a good or service demanded changes as the price changes. The demand curve shows the maximum price a consumer is willing to pay for a given quantity of a good or service. As the price of a good or service increases, the quantity demanded decreases, and vice versa.

Consumer Surplus

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a given quantity of a good or service and the actual price the consumer pays. The consumer surplus is the extra benefit the consumer receives from purchasing a good or service at a lower price than the maximum they are willing to pay.

Related Questions

  • What is the definition of utility?
  • What are the four basic assumptions of consumer theory?
  • What is the law of diminishing marginal utility?
  • What is the difference between a demand curve and a supply curve?
  • What is the relationship between price and quantity demanded?
  • What is the purpose of a demand schedule?
  • What is the concept of consumer surplus?
  • How do changes in price affect consumer surplus?
  • What are the three basic principles of consumer behavior?
  • What is the difference between a consumer’s demand and a firm’s demand?