David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

5.1 Demand by a single consumer
is better than, worse than or exactly as good as
another. This assumption rules out the possibility
that a consumer facing different bundles cannot
decide which one she prefers.
• Transitivity We assume that the ranking of
possible bundles is internally consistent: if bundle
a is preferred to bundle b and bundle b is preferred
to bundle c, then bundle a must be preferred to
bundle c.
• Consumers prefer more to less If bundle b offers
more films but as many meals as bundle c, we assume
bundle b is preferred. The same applies if bundle
b offers more meals but as many films as bundle
c. What about things like pollution, which are not
goods but 'bads'? Consumers do not prefer more
pollution to less. We get round this problem by
redefining commodities so that our assumption
is satisfied. We analyse clean water rather than
polluted water. More clean water is better than less.
Figure 5.1 examines the implications of these three
assumptions about taste. Each point shows a consumption
bundle of films and meals. Now it is clear
why we assumed that a consumption bundle contains
only two goods. This assumption allows us to
represent our analysis using nice and simple graphs,
since a consumption bundle can be depicted as
a point where the co-ordinates are the quantities of
the two goods. For example, in Figure 5.1 point a
II)
8-
6-
E
-
ii:
de • c
4-
2 -
?
a
b • •e
Dominated
region
Preferred region
0 I I I I I
0 2 4 6 8 lQ QM
Meals
The consumer evaluates consumption bundles a, b, c, d
and e. With respect to point a, any point to the north-east
is preferred and any point to the south-west is dominated
by c. Points such as d or e in the other two regions may or
may not be preferred to a, depending on the consumer's
tastes.
Figure 5.1
bundles
Ranking alternative consumption
represents a bundle containing 3 films and 3 CDs. 2 We begin at bundle a. Since more is preferred to less,
any point such as c to the north-east of a is preferred to a. Point c offers more of both goods than a.
Conversely, points to the south-west of a offer less of both goods than a. Point a is preferred to points such
as b. By transitivity, since bundle c is preferred to bundle a and bundle a is preferred to bundle b, then it
must be that bundle c is preferred to bundle b. Notice that, given the assumptions made about the tastes of
our consumer, we cannot be sure how points in the other two regions (north-west, south-east) compare
with a. At d or e, the consumer has more of one good but less of the other good than at a. Someone who
really likes food might prefer e to a, but an avid film buff would prefer d to a.
Consumers prefer more to less. An extra meal increases utility. To hold utility constant when a meal is
added, the consumer must sacrifice some of the other good (films). The marginal rate of substitution tells
us how many films the consumer could exchange for an additional meal without
changing total utility.
Suppose the student has 5 films and no meals. Having already seen 4 films, she
does not enjoy the fifth film much. With no meals, she is very hungry. The utility
of this bundle (5 films and zero meals) is low: being so hungry, she cannot enjoy
films anyway. For the same low amount of utility she could give up a lot of films
for a little food.
The marginal rate of
substitution of meals for
films is the quantity of films
the consumer must sacrifice to
increase the quantity of meals
by one unit without changing
total utility.
2 The main results we get from our analysis will not change if we allow consumption bundles to contain more than two goods.
However, in that case, the analysis will be slightly more complicated.
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