Preferences | Micro Economics | Hal Varian

• The objects of consumer choice are called consumption bundles, which represent a complete list of all goods and services relevant to the consumer’s choice problem. The term complete is essential because every good that can influence the consumer’s decision must be included in the bundle.

• When analyzing consumer choice, the consumption bundle should include all relevant goods and services. Omitting any good that affects the consumer’s decision results in an incomplete and inaccurate analysis of the choice problem.

• At the broadest level of consumer choice, a complete consumption bundle includes not only what goods are consumed but also when, where, and under what circumstances they are available, because these factors influence the consumer’s valuation of the goods.

• The value of a good depends on its time, location, and circumstances of availability:

  • Consumers value food today differently from food tomorrow, so the timing of consumption matters.

  • A raft in the Atlantic Ocean provides different usefulness than a raft in the Sahara Desert, making location economically relevant.

  • An umbrella during rain provides different value from an umbrella on a sunny day, showing that surrounding circumstances affect the usefulness of the same physical good.

  • Because consumers may value the same physical good differently across different situations, it is often useful to treat the same good in different times, places, or circumstances as different goods.

• In simple consumer choice problems, the relevant goods are usually easy to identify. To simplify analysis, economists often consider only two goods, with one representing the specific good of interest and the other representing all other goods, allowing the trade-off between one good and everything else to be analyzed using two-dimensional diagrams.

• Under the two-good framework, the consumer’s consumption bundle is represented as:
  [
  (x_1,x_2),
  ]
  where:

  • \(x_1\) denotes the quantity of the first good.

  • \(x_2\) denotes the quantity of the second good.

  • The entire consumption bundle may also be abbreviated as (X), representing the ordered pair \((x_1,x_2)\).

Consumer Preferences

• Consumer theory assumes that, for any two consumption bundles,
  [
  (x_1,x_2)\quad \text{and}\quad (y_1,y_2),
  ]
  the consumer can rank them according to desirability. The consumer can decide that one bundle is strictly better than the other or that the two bundles are equally desirable (indifferent).

• Strict preference is denoted by:
  [
  (x_1,x_2)\succ(y_1,y_2).
  ]
  This means the consumer strictly prefers bundle \((x_1,x_2)\) over \((y_1,y_2)\), i.e., given a choice, the consumer would definitely choose the (x)-bundle instead of the (y)-bundle.

• The concept of preference is behavioral (operational) rather than purely psychological. A consumer is said to prefer one bundle over another because actual choice behavior reveals that preference. If, whenever both bundles are available, the consumer always chooses:
  [
  (x_1,x_2),
  ]
  instead of
  [
  (y_1,y_2),
  ]
  it is natural to conclude that:
  [
  (x_1,x_2)\succ(y_1,y_2).
  ]

• Indifference is denoted by:
  [
  (x_1,x_2)\sim(y_1,y_2).
  ]
  It means the consumer is equally satisfied with either bundle according to his or her own preferences and would have no preference between consuming:
  [
  (x_1,x_2)
  ]
  or
  [
  (y_1,y_2).
  ]

• Weak preference is denoted by:
  [
  (x_1,x_2)\succeq(y_1,y_2).
  ]
  This means the consumer either strictly prefers \((x_1,x_2)\) or is indifferent between the two bundles. In other words, bundle \((x_1,x_2)\) is considered at least as good as bundle \((y_1,y_2)\).

• The three preference relations—strict preference, weak preference, and indifference—are interrelated rather than independent concepts.

• If:
  [
  (x_1,x_2)\succeq(y_1,y_2)
  ]
  and
  [
  (y_1,y_2)\succeq(x_1,x_2),
  ]
  then it follows that:
  [
  (x_1,x_2)\sim(y_1,y_2).
  ]
  If each bundle is considered at least as good as the other, the consumer must be indifferent between them.

• If:
  [
  (x_1,x_2)\succeq(y_1,y_2),
  ]
  but it is not true that
  [
  (x_1,x_2)\sim(y_1,y_2),
  ]
  then it must be that:
  [
  (x_1,x_2)\succ(y_1,y_2).
  ]
  This means that if bundle \((x_1,x_2)\) is at least as good as bundle \((y_1,y_2)\) and the consumer is not indifferent between them, then the consumer must strictly prefer \((x_1,x_2)\) over \((y_1,y_2)\).