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The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves.It analyzes how consumers maximize the desirability of their consumption (as measured by their preferences subject to limitations on their expenditures), by maximizing utility subject to a consumer budget constraint. [1]
Revealed preference theory, pioneered by economist Paul Anthony Samuelson in 1938, [1] [2] is a method of analyzing choices made by individuals, mostly used for comparing the influence of policies [further explanation needed] on consumer behavior.
A simple example of a preference order over three goods, in which orange is preferred to a banana, but an apple is preferred to an orange. In economics, and in other social sciences, preference refers to an order by which an agent, while in search of an "optimal choice", ranks alternatives based on their respective utility.
Local nonsatiation (LNS [2]) is often applied in consumer theory, a branch of microeconomics, as an important property often assumed in theorems and propositions.Consumer theory is a study of how individuals make decisions and spend their money based on their preferences and budget.
In 1947, John von Neumann and Oskar Morgenstern proved that any individual whose preferences satisfied four axioms has a utility function, where such an individual's preferences can be represented on an interval scale and the individual will always prefer actions that maximize expected utility. [1]
Consumer preferences have three properties: completeness, transitivity and non-satiation. For a preference to be rational, it must satisfy the axioms of transitivity and Completeness (statistics). The first axiom of transitivity refers to consistency between preferences, such that if x is preferred to y and y is preferred to z, then x has to be ...
If all these axioms are satisfied, then the individual is rational. A utility function can represent the preferences, i.e., one can assign numbers (utilities) to each outcome of the lottery such that choosing the best lottery according to the preference amounts to choosing the lottery with the highest expected utility.
In economics, a cardinal utility expresses not only which of two outcomes is preferred, but also the intensity of preferences, i.e. how much better or worse one outcome is compared to another. [1] In consumer choice theory, economists originally attempted to replace cardinal utility with the apparently weaker concept of ordinal utility.