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CONSUMER BEHAVIOR (I) 1 Roadmap Preferences and rationality axioms (today) Representation of rational preferences: utility Affordable bundles: budget set Consumer choice: utility maximization and individual demand Market demand 2 Outline (today) Consumer theory Preference axioms Indifference curves Marginal rate of substitution 3 Outline (today) Consumer theory Preference axioms Indifference curves Marginal rate of substitution 4
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A model of consumer behavior A formal description of how consumers behave Purposes: - Predict consumers’ choices in order to determine demand for goods - Evaluate effects of price increases on consumer well-being Examples: - Does the food stamps program lead the poor to buy more food or simply to subsidize food they would have bought anyway? - How should General Mills determine the price of a new cereal? - How do drivers react to an increase in gas price (in the short-run and in the long-run)? - Should I buy an iPhone X now? 5 Consumer theory building blocks Preferences: what consumers like Budget constraint: what consumers can afford Choice: decisions consumers make so as to achieve the highest possible well-being (a.k.a. utility) 6 Preference relations Pref er ence re la tion: describes an individual’s attitude towards alternatives (bundles) Bun dle: list with specific quantities of one or more goods, e.g.
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  • Fall '15
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