Consumer Theory

 a core concept in Economic Analysis and Atlas102


Click for MIT OCW course

Concept description

Consumer theory analyzes consumer behaviour.

As noted by MIT OpenCourseWare (link on right):

“The decisions that individuals make about what and how much to consume are among the most important factors that shape the evolution of the overall economy, and we can analyze these decisions in terms of their underlying preferences. You will learn how to model consumer preferences in a utility function, and use this utility function to make predictions about what consumers will do when they have a given income and can buy goods at a given price. You will also learn how to analyze the decision of whether and how much individuals choose to work.”

In the Cowen and Tabarrok online course, Principles of Economics – Microeconomics (see, consumer behaviour is treated under the topic of Elasticity of Demand and Supply. More traditional introductory courses devote several lectures to consumer theory. For example, Principles of Microeconomics provided on MIT OpenCourseWare (at, accessed 12 May 2016) deals with consumer theory in four one-hour video lectures (the fourth of which is covered in Labour Markets, Transfers, and Personal Taxes). These are listed below with the links on the chapters pointing to the section of the video lecture:

  1. Preferences and Utility (at with six chapters:
    1. Introduction to Consumer Theory (00:04:39)
    2. Consumer Preference Assumptions (00:04:52)
    3. Properties of Indifference Curves (00:10:26)
    4. Utility Functions (00:03:15)
    5. Marginal Utility (00:09:18)
    6. Marginal Rate of Substitution (00:15:34)
  2. Budget Constraints (at with six chapters:
    1. Budget Constraints and the Marginal Rate of Transformation (00:10:12)
    2. Shocking the Budget Constraint (00:04:47)
    3. Constrained Utility Maximization: Graphical Analysis (00:06:44
    4. Constrained Utility Maximization: Mathematical Derivation (00:14:16
    5. Corner Solutions (00:03:03)
    6. Applying Constrained Utility Maximization (00:07:06)
  3. Deriving Demand Curves (at, with five chapters:
    1. Application of Budget Constraints: Food Stamps (00:15:36)
    2. Drawing Demand Curves (00:07:47)
    3. Drawing Engel Curves (00:03:07)
    4. The Income Elasticity of Demand (00:06:33)
    5. Substitution and Income Effects (00:14:16)
  4. Applying Consumer Theory – Labor (at
    1. Review: Income and Substitution Effects (00:10:10)
    2. The Labor-Leisure Tradeoff (00:07:33)
    3. Impact of Wage Changes on Labor-Leisure Tradeoff (00:08:43)
    4. Determinants of Labor Supply: Change in Consumption (00:14:15)
    5. Impact of Labor Supply on Unemployment (00:09:38)

Most of the concepts used the treatment of consumer theory provide by MIT OpenCourseWare and other MPP/MPA courses are also used by Cowen and Tabarrok, with the exception of the following, where other sources are used to develop the Atlas entry:

Assumption of Convex Preferences

Assumption of Monotonic Preferences

Assumption of Transitive Preferences

Budget Line

Corner Solution

Engel Curve

Income Effect

Income Offer Curve

Indifference Curve

Isoquant Curve

Isowelfare Curve

Law of Diminishing Marginal Utility

Marginal Utility

Marginal Rate of Substitution

Marginal Rate of Transformation

Monotonic Transformation

Ordinary Good

Reservation Price

Substitution Effect

Assessment Questions

The following problem set is from MIT OpenCourseWare at and, accessed 26 May 2016.




MIT OpenCourseWare, Consumer Theory, at, accessed 12 May 2016.

Atlas topic and subject

Consumer Theory and Elasticity of Demand and Supply (core topic) in Economic Analysis.

Page created by: Ian Clark, last modified on 26 May 2016.

Image: MIT OpenCourseWare, Consumer Theory, at, accessed 12 May 2016.