Chapter 12 Consumer Theory
Consumer theory is to demand as producer theory is to supply. The major difference is that producer theory assumes that sellers are motivated by profit, and profit is something that one can usually directly measure. Moreover, the costs that enter into profit arise from physical properties of the production process—how many coffee cups come from the coffee-cup manufacturing plant? In contrast, consumer theory is based on what people like, so it begins with something that we can’t directly measure but must infer. That is, consumer theory is based on the premise that we can infer what people like from the choices they make.
Now, inferring what people like from the choices they make does not rule out mistakes. But our starting point is to consider the implications of a theory in which consumers don’t make mistakes, but make choices that give them the most satisfaction.
Economists think of this approach as analogous to studying gravitation in a vacuum before thinking about the effects of air friction. There is a practical consideration that dictates ignoring mistakes. There are many kinds of mistakes—for example, “I meant to buy toothpaste, but forgot and bought a toothbrush” (a memory problem); “I thought this toothpaste was better, but it is actually worse” (a learning issue); and “I meant to buy toothpaste, but I bought crack instead” (a self-control issue). All of these kinds of mistakes lead to distinct theories. Moreover, we can understand these alternative theories by understanding the basic theory first, and then we can see where the changes to these theories lead.