Lecture 4

# Lecture 4 - ECONOMICS 100A Professor Rika Mortimer Lecture...

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ECONOMICS 100A Professor Rika Mortimer 1/29/09 Lecture 4 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENT I have emailed all the GSI’s Office Hours to you this morning. If you cannot make it to any of your own GSI’s time, then I suggest you visit other GSI’s office hours. When we talk about price elasticity of demand, it’s always negative. So we are more concerned about the magnitude of the elasticity rather than the positive/negative sign attached. Sometimes when I get sloppy and say “large” or “small” elasticity, I am referring to its magnitude. LECTURE Today we hope to finish Chapter 3. I went over the slides last time on indifference curves so I will go quickly. Any basket in the orange area is preferred to the point A, since point E has more of each goods than A. Applying the same reasoning, those in the green region are less preferred to point A. This means that the indifference curve has a negative slope. Along this curve, the level of satisfaction remains constant. On an indifference map, we have a whole bunch of indifference curves. An indifference map is a graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent. Any market basket on indifference curve U3, such as basket A, is preferred to any basket on curve U2. I think this is also very intuitive, because if you pick point A, you have more of each good than point B. Naturally, A would be preferred more than B. So as you move outward, the satisfaction level increases. Indifference curves cannot intersect. If indifference curves U1 and U2 intersect, preferences are not transitive. According to this diagram, the consumer should be indifferent among market baskets A, B, and D. Yet B should be preferred to D because B has more of both goods. So this basically violates the assumption we made about indifference curves. Also, what this means is that every consumption basket has to lie on one and only one indifference curve. This basically falls directly from the previous reasoning. Another thing to note is that indifference curves are not thick. We talked about the assumptions we made for preferences. The term that you need to remember is the marginal rate of substitution (MRS). That’s just the slope of the indifference curve. This is the maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good, with the same overall satisfaction. That is the magnitude of the slope of an indifference curve: Δ C/ Δ F. Starting from basket A, this person is willing to give up 6 units of clothing

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## This note was uploaded on 02/07/2009 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

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Lecture 4 - ECONOMICS 100A Professor Rika Mortimer Lecture...

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