Consumer choice

Consumer choice describes how people select goods and services given their preferences, prices, and limited income. Its models explain the trade-offs underlying demand.

Utility maximization: A decision rule in which an agent selects the feasible option with the greatest utility. It formalizes the goal of choosing the most preferred affordable bundle.
Preference relation: A formal ordering of alternatives according to how desirable they are to a decision-maker. Consumer models need an ordering to compare possible bundles.
Consumer demand: The quantities of goods and services consumers are willing and able to buy at different prices. Individual choices aggregate into the demand observed in markets.
Satiation: A condition in which additional consumption no longer increases, and may reduce, a person’s satisfaction. It challenges the assumption that more of a good is always preferred.
Budget constraint: A limit on the combinations of goods an agent can afford given income and prices. It defines which bundles are feasible for a consumer.
Utility function: A mathematical representation that assigns numbers to alternatives while preserving a preference ranking. It encodes the consumer’s ranking of goods bundles.
Price elasticity of demand: A measure of how strongly quantity demanded responds to a change in price. Choice responses to price changes determine the elasticity of demand.
Bounded rationality: Decision-making under limits on information, time, and computational ability. It replaces perfect optimization with choices shaped by practical constraints.
Indifference curve: A curve connecting bundles of goods that yield the same utility to a consumer. It represents preference rankings used to identify the best affordable bundle.
Income effect: The change in demand caused by a change in purchasing power, holding relative prices fixed. A price change can alter real purchasing power as well as relative costs.

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