Econ 100A 3 Consumer Behavior

Econ 100A 3 Consumer Behavior - CONSUMER BEHAVIOR 3 Econ...

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Unformatted text preview: CONSUMER BEHAVIOR 3 Econ 100A Mortimer 8/28/2009 1 Consumer Behavior We will study how consumers allocate incomes among different goods and services to maximize their well-being. Consumer behavior is best understood in three distinct steps: 1. Consumer preferences 2. Budget constraints 3. Consumer choices Econ 100A Mortimer 8/28/2009 2 CONSUMER PREFERENCES Some Basic Assumptions about Preferences 1. Completeness Consumers can compare and rank all possible baskets. For example, for any two market baskets A and B , a consumer will prefer A to B , will prefer B to A , or will be indifferent between the two. Econ 100A Mortimer B A or A B B A 8/28/2009 3 Do consumers prefer one market basket to another? CONSUMER PREFERENCES Some Basic Assumptions about Preferences 2. Transitivity If a consumer prefers basket A to basket B and basket B to basket C , then the consumer also prefers A to C . Econ 100A Mortimer C A then C B and B A If , 8/28/2009 4 CONSUMER PREFERENCES Some Basic Assumptions about Preferences 3. More is better than less Goods are assumed to be desirable; consumers always prefer more of any good to less. C onsumers are never satisfied or satiated; more is always better, even if just a little better . Some goods, such as pollution, may be undesirable. In this case, we can redefine goods to be positive e.g., reduction in pollution Econ 100A Mortimer 8/28/2009 5 CONSUMER PREFERENCES Ordinal versus Cardinal Rankings ordinal rankings The order in which a consumer ranks baskets. It does not tell us how much more a consumer likes one basket than others . cardinal rankings The intensity of a consumers preferences. We know how much more the consumer likes one basket than others. Econ 100A Mortimer 8/28/2009 6 PREFERENCES WITH A SINGLE GOOD Utility Functions and Marginal Utility utility function Formula that measures the level of utility (or satisfaction) a consumer receives from any baskets of goods and services e.g., U(y) = y Econ 100A Mortimer 8/28/2009 7 marginal utility (MU) Additional satisfaction obtained from consuming one additional unit of a good. e.g ., MU y = dU/ dy= y 2 1 diminishing marginal utility Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility e.g., dMU y /dy = < y 4 1- 2 3- PREFERENCE WITH A SINGLE GOOD Econ 100A Mortimer 8/28/2009 8 U y y MU Utility Functions and Marginal Utility PREFERENCES WITH MULTIPLE GOODS...
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This note was uploaded on 09/07/2009 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Econ 100A 3 Consumer Behavior - CONSUMER BEHAVIOR 3 Econ...

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