5.4 : The Consumer Preferences I

Consumer Preferences

The cardinal approach of utility uses an imaginary measure of satisfaction, utils. In the ordinal approach, consumer preferences refer to the ranking a consumer makes between different product bundles or baskets. A market basket is a collection of products a consumer can purchase. Two goods are taken in a basket to explain consumer preferences. For example, a market basket could have coffee and sandwiches.

Assumptions about Consumer Preferences

The following assumptions are made:

1. Completeness.
2. Monotonic preferences or more is better.
3. Transitivity.
4. As consumers accumulate more of a specific good, their willingness to sacrifice another item to acquire even more of those particular goods decreases.

Completeness

It means that consumers can compare and rank all possible combinations of products, known as baskets. A consumer can definitively state their preference for any two baskets, say A and B. They might prefer basket A over B, B over A, or view them as equally desirable.

Monotonic Preferences or More is Better

It means that consumers prefer more of any good to less. For instance, if a consumer is comparing baskets of goods, under the monotonic preferences assumption, they would always prefer the basket with more quantity.