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Banana’s From analysing these curves, we can note several assumptions.
Observations will tell us that consumer choices differ widely, be it between countries/ demographics, or just between one consumer and another.
Economists base their analysis on general propositions; making three general assumptions.
The convexity brings into consideration the marginal rate of substitution, otherwise abbreviated as MRS.
So, a consumer's MRS between chocolate, and apples is the maximum amount of chocolate that the consumer is willing to give up to obtain an additional apple.
The law of ‘Diminishing Returns’ must also be considered here given that it could be expected that as a consumer demands more of a particular good; the utility received from that good decreases. However, what needs to be added here is the idea of the , and how this impacts on utility.
With this in mind, there is some link between the utility of the good and the price elasticity of the good.However, the third assumption has always been up for discussion, with some arguing that this idea that a consumer prefers more goes against businesses which may seek to sell luxury products.We can now consider ‘Indifference Curves’ (pictured below), the chart will plot all the combinations of the two goods which offer the consumer the same utility.This leads to a decision as the consumer will look to maximise their utility based on purchasing a number of goods which allow them to reach the highest possible total utility.However, as mentioned before, the consumer will be constrained in their spending by their income; known as their budget constraint.The first assumption is that consumer preferences are , meaning that they can rank all market baskets in the order of their choice.So, considering Coca Cola and Pepsi, a consumer could either say that they prefer Coca Cola to Pepsi, Pepsi to Coca Cola, or are indifferent between the two.The following chapter will discuss consumer choice, considering theory behind utility maximisation, opportunity costs and consumer preferences.The theory of consumer choice is focused in microeconomics, relating to preferences for consumer expenditure, which in turn impacts on consumer demand curves.This can be seen in the figure below: Figure 3 - A visualisation of Marginal Rate of Substitution.As the consumer loses more of Good Y, they become more reluctant to give up further units for Good X.