Economics

Most economic literature assumes that consumers are rational, that is to say, that they choose optimal combinations of goods. To model this core paradigm, we have to identify the constraints on consumers and find ways to characterize the best choice given these constraints. The classic paradigm focuses on the case where there is only one constraint, namely, the budget. The consumer has a budget, that is, a certain amount of money to spend, and thus can buy any combination of goods whose total cost does not exceed the budget. Usually the prices of goods are taken as given and cannot be changed by the consumer and are not influenced by an individual consumer's choice. In this way, the total cost of any combination of goods is simply the sum of the costs of all goods bought where the cost of a good is the quantity of that good bought multiplied by the unit price of that good. Taking the budget and prices as given, the consumer is left choosing the quantities of the various goods—so much bread or rice, so much meat, so much clothing, and so on. The feasible set facing the consumer is the set of all those combinations of quantities that satisfy the budget constraint. Clearly, this set depends on the budget and the prices. At the end of the day, the consumer's budget is determined by his or her wealth. Typically, individual consumers are assumed to have no control or influence on prices; rather, prices are determined by the market. In other words, it is aggregate demand and aggregate supply, rather than individual consumers, that determine prices. This immediately suggests that two key determinants of an individual consumer's choice are that individual's wealth and [Page 503]the market prices of goods. That is not to say that every consumer with the same wealth and facing the same prices will choose the same bundle of goods; the model allows consumers to have different preferences and thus to choose different bundles when facing the same budget constraint. So wealth and prices do not determine choice but they do influence choice. A consumer can only choose a feasible option, an option that satisfies all constraints. Just what is chosen given the set of feasible options depends on the consumer's preferences.

To progress this viewpoint, it is necessary to clarify how economists understand preferences and optimal choice. On the one hand, consumers are assumed to have strict preferences; for example, you may think one brand of cola to be better than another. Here, “better” is an assessment of one good against the other, ignoring differences in prices, as opposed to the view that a preferred item will always be bought. If one option is strictly preferred over another, we can say the first dominates the second. At the same time, individuals may be indifferent between some goods; some may consider all forms of long grain rice to be the same and are thus indifferent between brands. A consumer is understood to have a weak preference of one choice over another if the consumer either prefers the first choice to the second or is indifferent between the two choices. That is to say, weak preference allows indifference.

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