Remember our own definition of economics? Yes, choice. Let’s now talk about what an individual actually does when we say "he chooses”. We’re going to talk about a typical consumer. Consumer is the most fundamental decision unit. (Or put it this way: every producer is also a consumer, but not the other way around).1 Understanding what a consumer does helps us understand what the other units do.
What is it that consumer choose over? Anything you can want: food, books, coffee, music, boyfriends, identity, clean air, sex, religion, justice, blog templates, et cetera. We call them commodities.2 Can we have them all? As much as we want? No, because there are constraints. The explanation to Mick Jagger’s “you can’t always get what you want” is because we face restriction(s). And that’s why we have to make a choice.
The first limitation is the physical constraint. This includes time, quantity, place, taste, and institution. We can’t choose a durian simply because it is not a durian season: no one is selling it. We can’t have leisure 25 hours in one day, because one day is only 24 hours, unfortunately. We can’t buy half a car, because the smallest quantity sold is one. We can’t eat u-dong in
The second limitation is the budget constraint. This is a matter of affordability that in turns depends on the level of your wealth – usually represented by income. For now we will have to employ two assumptions. First, all the commodities have a price and everybody knows it. Second, no one can affect the price, or more accurately: your individual act of buying doesn’t really affect what is going on in the market.3 Given the prices and your income, your feasible consumption bundles are now captured by what we call your budget set.
Another important assumption is that both the constraints are “convex”. This means, when your consumption set includes bundle A and bundle B, then it should also include any combination of the two bundles (e.g half of bundle A and half of bundle B, rather than A only or B only). Similarly, if both bundles are included in the budget set, so is any combination of them.
When finally you decide to make a choice given the consumption set and the budget set, we say you’re revealing your demand function. That’s the topic of our next talk.
1 This principle is very powerful to attack all the pathetic protection asked by producers. And to debunk all the harsh attack on consumerism. How so?
2 Try telling a girl that she is a commodity. If she is flattered ("Oh that so sweet, you’re telling me I’m valuable!"), she might have learned this stuff.
3 This is sometimes called ‘price-taking’ behavior. It doesn’t mean you can’t bargain at all. You can bargain, but whatever the price you and the seller agree doesn’t translate into the same change in the market.Econ 101