Consumer theory in the context of "Product information"

Revealed preference theory, pioneered by economist Paul Anthony Samuelson in 1938, is a method of analyzing choices made by individuals, mostly used for comparing the influence of policies on consumer behavior. Revealed preference models assume that the preferences of consumers can be revealed by their purchasing habits.

Revealed preference theory arose because existing theories of consumer demand were based on a diminishing marginal rate of substitution (MRS). This diminishing MRS relied on the assumption that consumers make consumption decisions to maximise their utility. While utility maximisation was not a controversial assumption, the underlying utility functions could not be measured with great certainty. Revealed preference theory was a means to reconcile demand theory by defining utility functions by observing behaviour.

In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within their given income. Consumer theory uses the concepts of a budget constraint and a preference map as tools to examine the parameters of consumer choices . Both concepts have a ready graphical representation in the two-good case. The consumer can only purchase as much as their income will allow, hence they are constrained by their budget. The equation of a budget constraint is ${\displaystyle P_{x}x+P_{y}y=m}$ where ${\displaystyle P_{x}}$ is the price of good X, and ${\displaystyle P_{y}}$ is the price of good Y, and m is income.

Choice modelling attempts to model the decision process of an individual or segment via revealed preferences or stated preferences made in a particular context or contexts. Typically, it attempts to use discrete choices (A over B; B over A, B & C) in order to infer positions of the items (A, B and C) on some relevant latent scale (typically "utility" in economics and various related fields). Indeed many alternative models exist in econometrics, marketing, sociometrics and other fields, including utility maximization, optimization applied to consumer theory, and a plethora of other identification strategies which may be more or less accurate depending on the data, sample, hypothesis and the particular decision being modelled. In addition, choice modelling is regarded as the most suitable method for estimating consumers' willingness to pay for quality improvements in multiple dimensions.

In microeconomics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa, violating the law of demand.

For ordinary goods, as the price of the good rises, the substitution effect makes consumers purchase less of it, and more of substitute goods; the income effect can either reinforce or weaken this decline in demand, but for an ordinary good never outweighs it. By contrast, a Giffen good is so strongly an inferior good (in higher demand at lower incomes) that the contrary income effect more than offsets the substitution effect, and the net effect of the good's price rise is to increase demand for it. This phenomenon is known as the Giffen paradox.

Sir John Richard Hicks (8 April 1904 – 20 May 1989) was a British economist. He is considered one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in microeconomics, and the IS–LM model (1937), which summarised a Keynesian view of macroeconomics. His book Value and Capital (1939) significantly extended general-equilibrium and value theory. The compensated demand function is named the Hicksian demand function in memory of him.

In 1972 he received the Nobel Memorial Prize in Economic Sciences (jointly) for his pioneering contributions to general equilibrium theory and welfare theory.