Consumption- Preferences Goods and bundles Consumers make choices over bundles of goods. Consumer theory models the way in which these choices are made uch as apples or bananas. A good may be specified in terms of time- such as ples today or apples tomorrow, or place -such as apples in Oxford or apples in London. a bundle of goods is a collection of goods- such as(3 apples, 2 bananas). The bundle can contain as many goods as necessary. For much of economics, only 2 goods are required. This allows a graphical representation Number of Apples(= r1) Write a bundle of goods as r=(r1, T2)where rn is the amount of good I and I2 the amount of good 2 in the bundle. How do consumers choose between bundles such as r and different bundles like y=(yI, yz)and z=(21, 22)? Consumption-Preferenees Preferences The basic premise of consumer theory is that consumers have preferences over bundles of goods. Write r >y if and only if bundle r is strictly preferred to bundle y. Write r w y if bundle r is not preferred to bundle y and bundle y is not preferred to bundle r. The cor Is indifferent between the two bundles. Write r> y if the consumer strictly prefers bundle r to bundle y or the consumer is indifferent. Equivalently, r is weakly preferred to Armed with such preferences the consumer can compare different bundles of goods. However, preferences are difficult things to work with is there a simple alternative?Consumption — Preferences 1 Goods and Bundles • Consumers make choices over bundles of goods. Consumer theory models the way in which these choices are made. • A good is simply a product — such as apples or bananas. A good may be specified in terms of time — such as apples today or apples tomorrow, or place — such as apples in Oxford or apples in London. • A bundle of goods is a collection of goods — such as (3 apples, 2 bananas). The bundle can contain as many goods as necessary. For much of economics, only 2 goods are required. This allows a graphical representation. Number of Bananas (= x2) Number of Apples (= x1) ·x · y · z 0 1 2 3 4 5 0 1 2 3 4 5 • Write a bundle of goods as x = (x1, x2) where x1 is the amount of good 1 and x2 the amount of good 2 in the bundle. How do consumers choose between bundles such as x and different bundles like y = (y1, y2) and z = (z1, z2)? Consumption — Preferences 2 Preferences • The basic premise of consumer theory is that consumers have preferences over bundles of goods. • Write x  y if and only if bundle x is strictly preferred to bundle y. • Write x ∼ y if bundle x is not preferred to bundle y and bundle y is not preferred to bundle x. The consumer is indifferent between the two bundles. • Write x º y if the consumer strictly prefers bundle x to bundle y or the consumer is indifferent. Equivalently, x is weakly preferred to y. • Armed with such preferences the consumer can compare different bundles of goods. • However, preferences are difficult things to work with — is there a simple alternative?