Lectire Week 4.pptx - Chapter 4 Econ 3620 Managerial Economics The Consumer The underlying foundation of demand therefore is a model of how consumers

Lectire Week 4.pptx - Chapter 4 Econ 3620 Managerial...

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Econ 3620 Managerial Economics Chapter 4
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The Consumer The underlying foundation of demand, therefore, is a model of how consumers behave. The individual consumer has a set of preferences and values whose determination are outside the realm of economics. They are no doubt dependent upon culture, education, and individual tastes, among a plethora of other factors. The measure of these values in this model for a particular good is in terms of the real opportunity cost to the consumer who purchases and consumes the good. If an individual purchases a particular good, then the opportunity cost of that purchase is the forgone goods the consumer could have bought instead.
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The Consumer Consumer make decisions by allocating their scarce income across all possible goods in order to obtain the greatest satisfaction. All consumers must choose which goods to buy, how much to buy because limits on wealth prevent them from buying everything that catches their attention. Therefore, consumers buy the goods that give them the most pleasure, subject to the constraint that they cannot spend more money than they have.
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Preference Consumers always choose goods which give the most pleasure. So how do we measure pleasure? And how do we rank the goods? Economists assume that consumers have a set of tastes or preferences that they use to guide them in choosing between goods. These preferences have to satisfy four properties:
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Properties of Consumer Preferences Property 1- Completeness: For any two bundles of goods either: . . . Property 2- More is better If bundle has at least as much of every good as bundle and more of some good, bundle is preferred to bundle . Property 3- Diminishing marginal rate of substitution As a consumer obtains more of good X, the amount of good Y the individual is willing to give up to obtain another unit of good X decreases. Property 4- Transitivity: For any three bundles, , , and , either: If and , then . If and , then . 4-5
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Individual Objectives Goods are things that people value. Goods include standard products like food and clothing, services like haircuts and education, as well as less tangible emotions such as love of family and charity. The economic model of behavior posits that people acquire goods that maximize their personal satisfaction, given their resource constraints (such as a limited income).
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  • Fall '18
  • Anna Terzyan

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