Consumers make many choices every day about what to buy and what not to buy. These choices involve many different goods: Buy a giant bag of Twizzlers and walk home, or buy a bus ticket and leave a sweet tooth unsatisfied? Buy a new video game or buy a new water pump for the car? Buy a ticket to the ball game or go to a bar for drinks with friends and watch the game on TV? To understand how consumers form their preferences for thousands of goods and services, we need to make some simplifying assumptions. Specifically, we assume that all decisions about what to buy share four properties that help consumers determine their preferences about all the possible combinations of goods and services they can buy.
consumption bundle
A set of goods or services a consumer considers purchasing.
Completeness and rankability. This assumption implies that consumers can make comparisons across all sets of goods that they consider. Economists use the term consumption bundle (or just bundle) to describe any collection of these goods. The assumption means that, given any two bundles, a consumer can decide which she prefers (or whether she is indifferent, meaning she likes them the same). This assumption is important because it means that we can apply economic theory to any bundle of goods we want to discuss. Whether the bundle includes sapphires and SUVs; movies, motorcycles, modern art, and marshmallows; or iPads, Ikea furniture, and iceberg lettuce, the consumer can decide which bundle she likes better.
Note, however, that this assumption does not tell us what kinds of bundles the consumer will like more than others. It just implies she is able to determine if one is better than the other.
For most goods, more is better than less (or at least more is no worse than less). In general, more of a good thing is good. If we like a car that is safe in a crash, we would like that same car even better if it were even safer.1
1 There may come a point at which more of a good thing stops being better. Economists call this a satiation point. For instance, the first jelly bean may make us happy, but the 1,437th jelly bean might actually make us sick if we ate it, making us worse off than had we eaten only 1,436. However, because people can sometimes save extra jelly beans for later, trade them with someone else for something they want, or just give them away, satiation points tend not to be very important in practice.
In addition, to keep things relatively simple, we also assume that consumers can discard unwanted goods at no cost, a concept economists call “free disposal.”
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Transitivity. For any three bundles of goods (call them A, B, and C), if a consumer prefers A to B and also prefers B to C, then she prefers A to C. If you prefer apples to oranges, and you prefer oranges to bananas, then transitivity implies that you must also prefer an apple to a banana. Note that, as always, we are holding everything else constant when making these comparisons. Transitivity does not mean that you prefer apples to bananas in all situations, only that, at a given moment, you prefer apples to bananas. Transitivity imposes logical consistency on the preferences.
The more a consumer has of a particular good, the less she is willing to give up of something else to get even more of that good. The idea behind this assumption is that consumers like variety. If you like birthday cake and haven’t had cake lately, you might be willing to give up a lot for some cake. You might pay a high price for a cake, take the afternoon to bake a cake, or trade away your last carton of milk for some cake. On the other hand, if you’ve just polished off two-
2 In some special cases, this might not be right. Most people would prefer having a second water ski or a second snow ski to having one of each, for example. But it’s almost always true and makes the analysis much simpler.