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Unformatted text preview: Chapter 4: Consumer Choice • The model of consumer behavior is based on the premises: 1. Individual tastes or preferences determine the amount of pleasure people derive from the goods and services they consume 2. Consumers face constraints or limits on their choices 3. Consumers maximize their well-being or pleasure from consumption, subject to the constraints they face Main topics 1. Preferences: We use three properties of preferences to predict which combinations, or bundle of goods an individual prefers to other combinations 2. Utility: Economists summarize a consumer’s preferences using a utility function, which assigns a numerical value to each possible bundle of goods, reflecting the consumer’s relative ranking of these bundles 3. Budget constraints: Price, income, and government restrictions limit a consumer’s ability to make purchases by determining the rate at which a consumer can trade one good for another 4. Constrained consumer choice: Consumers maximize their pleasure from consuming various possible bundles of goods given their income, which limits the amount of goods they can purchase 4.1 Preferences • Economists assume that consumers have a set of tastes or preferences that they use to guide them in choosing between goods • Economists make three assumptions about the properties of consumers’ preferences 1. Completeness : this property holds that when facing a choice between any two bundles of goods, a consumer can rank them so that one of the following relationships is true: a. The consumer prefers the first bundle to the second b. The consumer prefers the second bundle to the first c. The consumer is indifferent between them 2. Transitivity: this property is that a consumer’s preference over bundles is consistent in the sense that, if the consumer weakly prefers Bundle z to Bundle y and weakly prefers Bundle y to Bundle x the consumer also weakly prefers Bundle z to Bundle x 3. More is better: all else the same, more of a commodity is better than less of it a. Good: a commodity for which more is preferred to less, at least at some level of consumption...
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- Spring '08
- Utility, Consumer, Transitivity