Introduction

This chapter studies how an individual consumer decides to spend her income across the different goods available to her -- what economists call the problem of choice. Naturally, any consumer wants the combination of goods that gives her the greatest satisfaction; what that 'best' combination turns out to be depends on her preferences and on what she can actually afford, which in turn depends on prices and her income. Two different frameworks are used to explain consumer behaviour in this chapter: Cardinal Utility Analysis and Ordinal Utility Analysis.

Preliminary Notations and Assumptions

A real consumer buys many different goods, but to keep the analysis manageable, this chapter simplifies the consumer's choice problem down to just two goods -- bananas and mangoes. Any particular combination of quantities of the two goods is called a consumption bundle, or simply a bundle. Throughout the chapter, the variable $x_1$ denotes the quantity of bananas and $x_2$ the quantity of mangoes (both can be zero or positive), so the bundle $(x_1, x_2)$ represents a specific combination -- for instance, the bundle $(5, 10)$ means 5 bananas and 10 mangoes, which is a different bundle from $(10, 5)$.