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Econ 4010 Lecture 3

Econ 4010 Lecture 3 - Reconsidering Preferences...

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<Lecture 3> Reconsidering Preferences PP.102-103 1. The theory of consumer choice rests on the assumption that people behave rationally in an attempt to maximize the satisfaction that they can obtain by purchasing a particular combination of goods and services. 3. Consumers make choices by comparing market baskets or bundles of commodities. Preferences are assumed to be complete and transitive. In addition, economists assume that more of each good is always preferred to less. 8. Consumers maximize satisfaction subject to budget constraints. - A criticism of neoclassical theory of consumer: endogenous preferences <Herbert Gintis and Paul Romer, The Human Side of Economic Analysis: Economic Environments and the Evolution of Norms and Preferences, The Network on Norms and Preferences, 1997> Conventional economics uses a rational actor model that treats the individual as a self-interested utility maximizer with preferences over a narrow range of personal consumption items. Preferences in the rational actor model are moreover considered as determined outside the economic system and unaffected by the individual's economic behaviour. However a considerable body of empirical evidence contradicts this view. - People are motivated by duty and obligation as well as utility - They have preferences over the well-being of others (they are both altruistic and vengeful) - They are concerned with issues of equity and dignity in interpersonal relations - Their preferences are determined in part by the character of the economic institutions within which they operate - Their well being depends on the quality of their social relations and the extent to which they have developed their personal capacities, not only on the quantity and quality of the goods and services at their disposal Economists currently make policy recommendations based on a model of the economy in which individual preferences are determined through social and biological processes that are outside the economic system. In effect, traditional economic theory recognizes that individuals produce goods and services, but does not recognize that the economy produces people, their preferences and their values. However there is strong and compelling evidence that preferences are not formed outside the economic system, but rather are constituted through the interaction between individuals and the face-to-face communities to which they belong. The most reasonable setting for the rational actor model is the consumer in the supermarket choosing a commodity bundle subject to a budget constraint. 1
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But if it is generally valid, the model must also apply to such socially complex areas as the cooperation, conflict, and equity in the firm; criminal behaviour; education and skill-acquisition, long-term trade-offs between commodity consumption and environmental quality; addictive behaviour; as well as gender, racial, ethnic, and religious discrimination. The traditional actor model is simply not suited to modeling such areas of economic life.
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