Back to: Economics – For University level
3.1 Consumer Preferences
Consumer behavior begins with preferences—the foundation upon which all economic choices are built. In everyday life, we constantly make decisions: Should I buy coffee or tea? Should I save or spend? But how do economists model such decisions systematically?
In microeconomic theory, consumer preferences are the starting point for understanding demand. Preferences represent the consumer’s ranking of different bundles of goods and services based on the satisfaction (or utility) they provide.
How Do We Represent Preferences?
Economists use precise notation to describe how a consumer compares two bundles of goods. Suppose a consumer is choosing between two bundles:
- Bundle X: e.g., (3 oranges, 2 bananas)
- Bundle Y: e.g., (1 orange, 5 bananas)
The consumer might do one of the following:
- Strictly prefer one bundle over another:
X ≻ Ymeans “X is strictly preferred to Y.” - Be indifferent between them:
X ∼ Ymeans “The consumer gets the same satisfaction from X and Y.” - Weakly prefer X to Y:
X ⪰ Ymeans “X is at least as good as Y” (includes both strict preference and indifference).
Logical Consistency in Preferences
For preferences to be useful in economic modeling, they must follow certain rationality assumptions:
| Property | Description | Example |
|---|---|---|
| Completeness | The consumer can compare any two bundles. | For any X and Y, either X ⪰ Y, Y ⪰ X, or both. |
| Transitivity | Preferences are logically consistent. | If X ⪰ Y and Y ⪰ Z, then X ⪰ Z. |
| Reflexivity | Any bundle is at least as good as itself. | X ⪰ X always holds. |
These assumptions ensure that the consumer’s choices are predictable and non-contradictory—essential for building economic models.
From Preferences to Observable Behavior
Since we cannot directly observe a person’s internal preferences, economists infer preferences from choices. If a consumer consistently chooses bundle X over Y when both are affordable, we infer that X ≻ Y.
Imagine Amina has Birr 100. She can buy either:
– Bundle A: 4 books and 2 pens
– Bundle B: 2 books and 6 pens
If she chooses A even though B is also affordable, economists conclude:
A ≻ B.
Why This Matters
Preferences are the first step in the consumer choice model:
What the consumer wants
What the consumer can afford
Best affordable bundle
Without well-defined preferences, we cannot predict how consumers will respond to changes in prices or income—making this concept essential for understanding demand, welfare, and policy impacts.
In the next sections (3.2 and 3.3), we’ll explore how preferences connect to utility—and how economists measure or rank satisfaction using cardinal and ordinal approaches.