What Is Consumption Bundle? Definition And Explanation. - Penpoin

Contents

• Consumption bundles in the indifference curve
• Optimal consumption bundle
• LEARN MORE

Consumption bundle represents a basket of combinations of goods and services that people want to consume. Economists use a basket of products to explain the concept of utility. Two baskets are two different bundles because the quantity of one item is different, even if each basket contains the same item.

For example, there are three baskets containing apples and oranges. Basket A contains 4 apples and 5 oranges. Meanwhile, basket B contains 5 apples and 4 oranges. Then, the third basket contains 6 apples and 3 oranges. All three are considered different bundles because they contain a combination of varying amounts, even though they both consist of apples and oranges.

Consumption bundles in the indifference curve

Utility theory tries to answer the question of why a consumer prefers basket A to basket B. For other consumers, he prefers basket B to basket C.

When the axiom of consumer preference theory is fulfilled, the bundles will form indifference curves, which show the combination of goods that produce utility equally. The higher the indifference curve (located on the upper right), the higher the utility consumers get from a combination of products.

One such axiom is the transitivity of preference. For example, a consumer prefers to bundle A rather than bundle B. And rather than C, the consumer prefers B. we can conclude that the consumer also prefers A over C.

Optimal consumption bundle

The optimal consumption bundle is the bundle of goods within the budget limit and has the highest satisfaction (utility). Simply, it’s optimal if the consumer likes it the most and is still affordable with money in the pocket.

In a graph, optimal bundles occur at the point of intersection between the budget constraint line and the indifference curve. We call this point consumers’ equilibrium, where consumers get maximum consumption satisfaction with their income.

The budget constraint line shows the combination of two items that fit consumer money in a pocket. Rising prices of goods reduce consumer purchasing power, causing the budget constraint line to shift to the left. When it comes to a lower indifference curve, it represents a reduced level of utility.

Conversely, falling prices will cause the budget line to shift to the right. Intersection with the budget line shows that with the same nominal income, consumers get satisfaction).

LEARN MORE

• Utility Function: Why It Matters, How It Works
• Utility: Meaning, Types
• How the law of diminishing marginal utility explains the demand curve
• Consumer Choice Theory: Rationale and Axioms
• Substitution Effect: Meaning, Impacts, Types of Goods
• Income Effect: Meaning, Implications
• Marginal Benefit: Definition, Examples & Relationship With Demand Curve
• Conspicuous Consumption: Meaning, Reasons, Importance