Consumer Choice - Assumptions

Assumptions

The behavioral assumption of the consumer theory proposed herein is that all consumers seek to maximize utility. In the mainstream economics tradition this activity of maximizing utility has been deemed as the "rational" behavior of decision makers. More specifically, in the eyes of economists, all consumers seek to maximize a utility function subject to a budgetary constraint. In other words, economists assume that consumers will always choose the "best" bundle of goods they can afford. Consumer theory is therefore based around the problem of generate refutable hypotheses about the nature of consumer demand from this behavioral postulate. In order to reason from the central postulate towards a useful model of consumer choice, it is necessary to make additional assumptions about the certain preferences that consumers employ when selecting their preferred "bundle" of goods. These are relatively strict, allowing for the model to generate more useful hypotheses with regard to consumer behaviour than weaker assumptions, which would allow any empirical data to be explained in terms of stupidity, ignorance, or some other factor, and hence would not be able to generate any predictions about future demand at all. For the most part, however, they represent statements which would only be contradicted if a consumer was acting in (what was widely regarded as) a strange manner. In this vein, the modern form of consumer choice theory assumes:

Preferences are complete

Consumer choice theory is based on the assumption that the consumer fully understands his or her own preferences, allowing for a simple but accurate comparison between any two bundles of good presented. That is to say, it is assumed that if a consumer is presented with two consumption bundles A and B each containing different combinations of n goods, the consumer can unambiguously decide if (s)he prefers A to B, B to A, or is indifferent to both. The few scenarios where it is possible to imagine that decision-making would be very difficult are thus placed "outside the domain of economic analysis".

Preferences are reflexive

Means that if A and B are in all respect identical the consumer will consider a to be at least as good as (is weakly preferred) to B. Alternatively, the axiom can be modified to read that the consumer is indifferent with regard to A and B.

Preference are transitive

If A is preferred to B and B is preferred to C then A must be preferred to C.

This also means that if the consumer is indifferent between A and B and is indifferent between B and C she will be indifferent between A and C.

This is the consistency assumption. This assumption eliminates the possibility of intersecting indifference curves.

Preferences exhibit non-satiation

This is the "more is always better" assumption; that in general if a consumer is offered two almost identical bundles A and B, but where B includes more of one particular good, the consumer will choose B.

Among other things this assumption precludes circular indifference curves. Non-satiation in this sense is not a necessary but a convenient assumption. It avoids unnecessary complications in the mathematical models.

Indifference Curves exhibit diminishing marginal rates of substitution

This assumption assures that indifference curves are smooth and convex to the origin.

This assumption is implicit in the last assumption.

This assumption also set the stage for using techniques of constrained optimization. Because the shape of the curve assures that the first derivative is negative and the second is positive.

The MRS tells how much y a person is willing to sacrifice to get one more unit of x.

This assumption incorporates the theory of diminishing marginal utility.

The primary reason to have these technical preferences is to replicate the properties of the real number system so the math will work.

Goods are available in all quantities

It is assumed that a consumer may choose to purchase any quantity of a good (s)he desires, for example, 2.6 eggs and 4.23 loaves of bread. Whilst this makes the model less precise, it is generally acknowledged to provide a useful simplification to the calculations involved in consumer choice theory, especially since consumer demand is often examined over a considerable period of time. The more spending rounds are offered, the better approximation the continuous, differentiable function is for its discrete counterpart. (Whilst the purchase of 2.6 eggs sounds impossible, an average consumption of 2.6 eggs per day over a month does not.)

Note the assumptions do not guarantee that the demand curve will be negatively sloped. A positively sloped curve is not inconsistent with the assumptions.