[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 5
THE CONSUMPTION
DECISION
∂
How many economic decisions have you made today? Did you decide to ride
the bus to campus rather than drive, buy a bagel for breakfast rather than
a muffin, or eat in a local café rather than at home? Perhaps you decided
to look for a new job or ask for more hours at your current one. You may have decided
to take out another student loan, or apply for a bank loan to buy a car. Maybe you set
aside some money to finance a trip this summer. If so, you then had to decide whether
to put your savings into an account at a bank or to invest in the stock market.
These decisions—about spending, about working, about saving, and about
investing—represent the basic economic choices all individuals face. In this chapter,
we focus on spending decisions. By studying these decisions, we will gain a better
understanding of the demand curves that were introduced in Chapter 3 and used
in Chapter 4. While our main focus will be on the basic model used by economists to
explain how consumers make their spending decisions, we will also see that in recent
years, new insights from fields such as psychology have enriched our understanding
of these choices.
The Basic Problem of
Consumer Choice
The basic framework for analyzing economic decision making was introduced in
Chapter 2. Consumers start by defining an opportunity set: they determine what is
possible given the constraints they face. In most cases we will discuss, what consumers
can purchase is constrained by their income. And for many decisions, the time available
to consumers also constrains their choices. Once the opportunity set is defined,
the consumer selects the most preferred option within it. Because opportunity sets
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