ABSTRACT
162In a market economy, consumers are the driving force behind all production decisions, since successful business firms “give consumers what they want.” This chapter enhances the understanding of how consumers decide what to purchase. Economists consider consumers to be rational, or purposeful and consistent. This assumption allows economists to predict and explain consumer choices. In particular, they are able to make strong predictions about how consumers respond to changes in income and relative prices. The law of diminishing marginal utility explains why consumers prefer variety. Real-world examples include meat consumption in the US and China and the diamond–water paradox.
