Lecture_02a_Preferences - Lecture 2a Preferences Outline 1...

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Lecture 2a: Preferences c ° 2008 Je/rey A. Miron Outline 1. Introduction 2. Consumer Preferences 3. Assumptions About Preferences 4. Indi/erence Curves 5. Examples of Preferences 6. Well°Behaved Preferences 1 Introduction Our goal in the ±rst part of the course is to build a model of the demand for various goods. We have so far considered the constraints facing an individual consumer who has the choice of purchasing from a set of goods, given prices and an amount of money to spend. In other words, we have discussed the budget constraint. This discussion of the budget set tells us what opportunities are available to this consumer, but they do not tell us what choices that consumer might make. To model choices, we need to add more to the model. We will call this preferences. The analysis here is a bit di/erent from EC10. In that course, for the most part, you just started from the demand curves (whether for an individual consumer or the market overall), thought about why demand curves should have particular properties, and used demand curves to analyze particular situations. 1
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To a limited extent, depending on exactly what principles course you had, you also discussed something more basic - a consumer²s indi/erence curves and the choices a consumer might make given some indi/erence curves. Here we are going to go backwards °to think about where ICs come from °and farther, by developing something called a utility function, which many of you have heard mentioned but may not have seen or used to any signi±cant degree. Our approach is usually referred to as the axiomatic approach. It provides the foundation for ICs, but is a bit more general than that. It also will lead us to the utility function analysis. So, the basic framework is the same as the one we considered last time: an indi- vidual consumer is faced with the choice between a number of possible consumption bundles. We assume that we can provide a complete ³list´or ³accounting´or description of all these bundles, including the details of the goods and services that make up these bundles. It is important to have a complete accounting of all the possible bundles; other- wise, the analysis might leave out choices that would be relevant. Now, however, rather than describing the constraints on what bundles this con- sumer can a/ord to purchase, we are going to talk about the consumer²s preferences between these consumption bundles. This is a distinct issue from explaining / modeling the consumer²s choices as to which bundles they actually purchase. Naturally, that is where we are headed: we will combine our model of the con- straints with our model of preferences to have a model of consumer choices. But for now we²re just modeling preferences. 2 Consumer Preferences Start with the case of two goods and denote the bundle as ( x 1 ; x 2 ) . We abbreviate this bundle as X . Sometimes x 1 is one particular good, and x 2 is all other goods.
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