This chapter introduces the important idea of a vector through the example of bundles of goods. The dot product of two vectors is defined and it is shown how a budget constraint can be expressed in terms of dot product. It is explained how, in order to rank bundles according to a particular consumer's preference, we can use a utility function. Indifference curves are defined as the contours of the utility function. Linear and convex combinations and the concept of a convex set are explained. The utility maximisation problem -- to maximise utility subject to a budget constraint -- is explored and the relevance of convexity is emphasised.

In this chapter, we describe final demand by domestic agents – private households, government, and investors – and by the export market. Data in the Social Accounting Matrix (SAM) describe agents’ incomes and the commodity composition of their spending. The computable general equilibrium (CGE) model depicts demand by domestic agents as a three-stage decision. First, consumers decide on the quantities of each commodity in their consumption basket. Second, an “Armington” import aggregation function describes their choice between domestic and imported varieties of each commodity. In some CGE models, a third stage describes the sourcing of imports. We survey functional forms commonly used in CGE models to describe private household preferences. We also introduce the concept of “national welfare,” which is the monetary value of changes in a nation’s well-being following an economic shock.