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PAM_2000_Spring_2009_Lecture_6

PAM_2000_Spring_2009_Lecture_6 - PAM 2000 Lecture 6 Agenda...

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    PAM 2000 Lecture 6 Agenda: Consumer choice: Indifference curves Properties of ICs Marginal Rate of Substitution
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    Consumer Choice Goal: To understand (or “model”) the process by which a consumer makes choices over various goods Think about a consumer buying a set or a “bundle” of goods Motivation: This will allow us to really understand the demand curve; where it comes from This is individual behavior; we think only of a particular person (Lisa)
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    Consumer Choice (con’t) How does she decide to buy a particular bundle? Need to describe or model two things: 1. What do consumers want? This is described through consumer preferences , or indifference curves To develop this idea need notion of utility
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    Consumer Choice (con’t) 2. What can consumers afford? This is described through the budget constraint or budget line or budget set. We can put these two things together by assuming that the consumer maximizes her utility subject to the constraint
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    Consumer Choice (con’t) Let's focus on #1: Consumer Preferences: We must make three assumptions about preferences before they are useful: Completeness Transitivity More is better
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    Consumer Choice (con’t) Completeness : The consumer is able to set up a preference ranking of the combinations available When presented with various bundles or combinations of goods, consumer can say which is better, or if they are the same; ranking order of goods
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    Consumer Choice (con’t) Consistency or Transitivity : The preferences of the consumer are consistent or transitive EX: Say there are three combinations of goods, A, B & C Preferences are transitive if consumer says: If A beats B and B beats C, then A beats C.
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