Concept

• 1
  Concept 1

  MIT Professor Jon Gruber explores the basic principles surrounding consumer choice theroy and preferences. "Rational choice theory, also known as choice theory or rational action theory is a framework for understanding and often formally modeling social and economic behavior.[1] It is the main theoretical paradigm in the currently-dominant school of microeconomics. Rationality (here equated with "wanting more rather than less of a good") is widely used as an assumption of the behavior of individuals in microeconomic models and analysis and appears in almost all economics textbook treatments of human decision-making. It is also central to some of modern political science and is used by some scholars in other disciplines such as sociology[2] and philosophy. It is the same as instrumental rationality, which involves seeking the most cost-effective means to achieve a specific goal without reflecting on the worthiness of that goal. Gary Becker was an early proponent of applying rational actor models more widely. (Wikipedia)"

  Estimated time: ~10 Minutes
• 2
  Concept 2

  MIT Professor Jon Gruber explores indifference curves and the graphical representations of consumer choice (preference maps). In microeconomic theory, an indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. One can equivalently refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]
  
  There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map.

  Estimated time: ~11 Minutes
• 3
  Concept 3

  MIT Professor Jon Gruber explores the concept of utility. "A consumer's utility is hard to measure. However, we can determine it indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility. Utility is a concept that was introduced by Daniel Bernoulli. He believed that for the usual person, utility increased with wealth but at a decreasing rate (http://www.investopedia.com)."

  Estimated time: ~13 Minutes
• 4
  Concept 4

  New York State College (OSWEGO) covers the core concepts of consumer choice theory. Consumer choice is a theory of microeconomics that relates preferences for consumption goods and services to consumption expenditures and ultimately to consumer demand curves. The link between personal preferences, consumption, and the demand curve is one of the most closely studied relations in economics. Consumer choice theory is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility as subject to consumer budget constraints.

  Estimated time: ~27 Minutes
• 5
  Concept 5

  MIT Professor Jon Gruber explores the Marginal Rate of Substitution. "Under the standard assumption of neoclassical economics that goods and services are continuously divisible, the marginal rates of substitution will be the same regardless of the direction of exchange, and will correspond to the slope of an indifference curve (more precisely, to the slope multiplied by -1) passing through the consumption bundle in question, at that point: mathematically, it is the implicit derivative. MRS of X for Y is the amount of Y for which a consumer is willing to exchange X locally. The MRS is different at each point along the indifference curve thus it is important to keep locally in the definition. Further on this assumption, or otherwise on the assumption that utility is quantified, the marginal rate of substitution of good or service X for good or service Y (MRSxy) is also equivalent to the marginal utility of X over the marginal utility of Y (Wikipedia)."

  Estimated time: ~11 Minutes
• 6
  Concept 6

  Professor Macomber discusses the basics of the budget constraint. A budget constraint represents the combinations of goods and services that a consumer can purchase given current prices with his or her income. Consumer theory uses the concepts of a budget constraint and a preference map to analyze consumer choices. Both concepts have a ready graphical representation in the two-good case.

  Estimated time: ~15 Minutes
• 7
  Concept 7

  New York State College (OSWEGO) covers the concept of opportunity cost. "Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.[1] The opportunity cost is also the cost of the forgone products after making a choice. Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice".[2] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.[3] Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs (Wikipedia)."

  Estimated time: ~28 Minutes
• Test
  Chapter 4 Test

  Take the chapter 4 test and unlock the Utility badge.