Answer:

The Four Building Blocks of Consumer Theory

Consumer theory is the study of how consumers make decisions and maximize utility when purchasing goods and services. The four building blocks of consumer theory are budget constraints, preferences, utility maximization, and marginal utility.

Budget Constraints

Budget constraints refer to the limits on the amount of goods and services a consumer can purchase. This includes their income and prices of the goods and services they are interested in purchasing. In other words, budget constraints are the limits on what a consumer can purchase given their financial resources.

Preferences

Preferences refer to a consumer’s desires and how they value certain goods and services over others. For example, a consumer may value a higher quality item more than a lower quality item. This can be seen in the way the consumer will be willing to pay more for the higher quality item.

Utility Maximization

Utility maximization is the idea that a consumer will try to purchase goods and services in such a way that they receive the highest total utility. This means that a consumer will try to purchase items that give them the most satisfaction for the lowest cost.

Marginal Utility

Marginal utility is the additional benefit a consumer receives from purchasing one additional unit of a good or service. The marginal utility of a good or service decreases as more units are purchased. This means that the first unit of a good or service will provide the most utility, and subsequent units will provide less and less.

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