CHAPTER 3
THE THEORY OF THE CONSUMER
3.1 INTRODUCTION
We will define a consumer as an individual or group of individuals who each possess income and values and who purchase goods and services, and who generally perform labor for this income. The fundamental problem of the consumer is one of determining the quantity of goods and services to purchase by the given prices for goods and services and the income of the consumer. The consumer will be assumed to make this choice such that the value, or satisfaction or utility, derived from consuming the goods and services is the greatest possible. We will assume, in this chapter, a single consumer, and we will also assume that the consumer is “rational” by being aware of alternative goods and services that may be purchased and capable of evaluating their worth in terms of their value and cost.
To do this we will postulate the existence of a utility function that measures the satisfaction or value derived from alternative goods and services. We will examine some concepts of utility maximization and determine demand functions that measure the quantity of goods and services a consumer will purchase by their price. Then we will examine various properties of this demand function. This will enable us to combine the theory of the firm and the theory of the household and determine various supply–demand or market equilibrium conditions, which is the subject of Chapter 4.
3.2 ECONOMIC UTILITY THEORY AND ITS AXIOMS
Suppose that we wish to purchase ...
