Consumer choice

The Financial theory is a fundamental discipline of microeconomics within economics. It examines the economic decisions, in particular the consumption decisions of ( private ) households (household optimum).

• 2.1 demand decision
• 2.2 Supply Decision

Basic assumptions

Satisfaction of needs

The considerations of the household theory that underlies all needs are ( materially and intangible) satisfied in a household. The satisfaction of needs is the real purpose of an economic activity. The better the needs are satisfied, the higher the benefits in economic terms.

Preferences

The individual households do not have individual preferences, that is, all households can be equated in microeconomics. Households have a so-called order of preference, that is, certain goods greater benefit is assigned as the others, and also combinations of several goods may be better than others in terms of their benefits and thus their preference. The ratio between the amount of consumed goods and their benefits can be displayed by the utility function. The relationship between the composition of bundles of various goods and their benefits is presented on indifference curves.

Rational behavior

Each household tries to maximize it within the available budget his gratification, so its caused by the consumption of goods benefits. The possibilities for consumption, has the household, 're at and below the so-called budget line. It is assumed that the household behaves rationally.

In addition, it is assumed that the individual demand or supply has no effect on market prices. This means that households are always takers.

Decisions of the household

The budget has to make two decisions to satisfy needs:

Demand decision

With the available budget of the household asks for the production of goods markets. The quantity demanded depends on which bundle of goods brings him the greatest benefit. The choice depends on the consumer price points. The analysis of these decisions provides the general demand functions. It explains the relationship between demand and commodity prices ( price elasticity ) and of demand and income (income elasticity).

Offer decision

Every household has to factor markets (production markets ) on labor and capital. Thus, the household decides:

• How much work he intends to offer to the market factor ( ie it decides on the allocation of his time on work and leisure ). The analysis of this decision provides the individual labor supply function.
• How much capital he wants to offer to the market factor ( ie it decides on the allocation of its budget on consumption and savings). This is the intertemporal utility maximization problem so called because of the budget between present-day and future consumption decisions. It provides, among others, in the financial sector, the explanation for why there ever is a capital market and how he creates benefits.

Supply and demand quantities of the household are interdependent because they affect the available budget.