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Leacture 2 - Introduction to Consumer Theory"Communism...

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Econ 201 - Principles of Microeconomics 1 Introduction to Consumer Theory “Communism doesn’t work because people like to own stuff.” ~ Frank Zappa Our discussion: Individual preferences and behavioural postulates Valuation The optimal-purchase rule and demand theory The Diamond-Water paradox Sale prices 1. Individual preferences Economists are concerned with the consequences of the combined actions of individuals. However, the forthcoming behavioral postulates are specific to individual preferences. Why? Because we can’t accurately describe the preferences of a group.
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Econ 201 - Principles of Microeconomics 2 Suppose three individuals’ preferences over three candidates, Bush, Kerry and Nader, are described as follows: The first individual prefers Bush to Kerry, and Kerry to Nader. The second prefers Kerry to Nader and Nader to Bush. The third prefers Nader to Bush and Bush to Kerry. How do we define preferences for this group? That is, what does “the group” prefer? No matter which candidate is chosen, a majority would rather have someone else. Behavioural postulates 1) People have preferences. 2) More is preferred to less. 3) People are willing to substitute. 4) Marginal values are decreasing. Notice… Midterm exam, Tuesday, 24 April. Where: In class. Format: 50 multiple choice questions. Bring student id. Bring a (50 question, green) Scantron sheet. Don’t wear a hat.
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Econ 201 - Principles of Microeconomics 3 2. Valuation We measure value by what one is willing to give up in order to obtain something. – That we observe one giving up $40,000 worth of other goods to buy a car reveals that the car has a value of at least $40,000 to the one. Q: What is “intrinsic value?” – An object cannot have value beyond what people are willing to pay for. Def: The total value of a quantity of a good to a consumer is the maximum amount of money she is willing to pay in order to acquire the good.
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