Copyright 2006, Glen R. Waddell. Econ 201 - Principles of Microeconomics1Introduction to Consumer Theory“Communism doesn’t work because people like to own stuff.”~ Frank ZappaOur discussion:1.Individual preferences and behavioural postulates2.Valuation3.The optimal-purchase rule and demand theory4.The Diamond-Water paradox5.Sale prices1.Individual preferencesEconomists 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.Suppose three individuals have preferences over three candidates, Kulongoski, Hill and Mannix:–The first individual prefers Kulongoski to Hill, and Hill to Mannix.–The second prefers Hill to Mannix and Mannix to Kulongoski.–The third prefers Mannix to Kulongoski and Kulongoski to Hill.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 postulates1.People have preferences.2.More is preferred to less.3.People are willing to substitute.4.Marginal values are decreasing.2. ValuationWe 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.
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