The Preference Approach to Marginal Benefit and Consumer Demand

Economists, like many other people, have been a bit skeptical about the idea that a person's satisfactions could be measured in a number, as the "utility" idea assumes. Twentieth-century economists have usually thought instead of "preference." Surprisingly, perhaps, the discussion of "consumers' preferences" can get quite technical and mathematical. We will instead take it at an intuitive level to get the flavor of the idea.

Think of a restaurant that sells barbecued chicken wings by the wing and french fries by the piece. The prices will be 45c a wing and 3c a piece of fried potatoes. (I don't know of a restaurant that sells wings and fries this way, but it will be ok for the example. I do know some restaurants that will sell you steak by the ounce, though, so maybe there really is one somewhere that sells wings by the wing.) Let's consider some alternative menus that John Doe could choose: no wings, one wing, two wings, and no fries, fifteen pieces of fries, or thirty pieces of fries. taking all possible combinations, we have 3x3 = 9 alternative lunches. Utility thinking says that each combination will give John a definite amount of utility. The preference approach says that, while John's satisfaction from consuming wings and fries may not be measurable as a number, John will be able to say whether he prefers two wings and fifteen pieces of fries to one wing and thirty pieces of fries. In general, John will be able to rank the alternatives as more or less preferable. Let's suppose John's ranking of the nine alternatives looks like this:

Table 7

		wings
		0	1	2
fries	0	eighth	seventh	fifth
	15	sixth	fourth	third
	30	fourth	second	first

This ranking illustrates some ideas from the preference approach.

First, preference is an order-ranking, not a number. This ranking from first preference to ninth applies specifically to these nine alternatives. If we were to consider more alternatives, the rankings might change, but in relative terms, they would be the same -- no wings and 15 fries will always be ranked ahead of one wing and no fries.
Second, John's preferences are applied to combinations of the two goods. It is not that John prefers wings to fries. Rather, John prefers one wing with thirty fries to two wings with fifteen fries, and also prefers one wing with fifteen fries to two wings with no fries. These combinations are often called "market baskets" in economics, with the idea that the basket contains specific amounts of two or more goods.
Third, given the amount of one good, more of the other good is preferred to less. For example, if John has one wing, 30 fries rank higher (second) than 15 (fourth). There could be limits to this, of course. If John is choosing the menu for a single meal, he might get full and prefer less to more. But, in more realistic examples, there will always be other goods beside wings and fries that John can spend his money on. So, even if John couldn't possibly eat another wing or another fry, there will be some goods that he does prefer more of, rather than less. That's good enough.
Fourth, notice that 1 wing and 15 fries is in a tie with no wings and 30 fries for fourth place. When two alternatives come up with the same ranking, we say the consumer is "indifferent" between them, and that the two alternatives are "indifferent choices" or "indifferent alternatives." This "indifference" relationship is not something to be "indifferent" about! It proves to be a very useful idea in the preference approach.

Now let's see how what this means when John spends his money.

Spending Decision