lect3 notes

Macroeconomics plus MyEconLab plus eBook 1-semester Student Access Kit (6th Edition)

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Econ 304 Sonoma State University Fall 2007 Dr. Robert Eyler Lecture #3 Microfoundations I: The work-leisure decision and profit maximization Dynamics are intertemporal decisions, where time plays a factor. 1. In most macroeconomic models, we implicitly look at time through the rate of interest. 2. However, the effects of changes in prices, rates, and income all play a part in determining changes in individual and firm decisions. 3. Moreover, the individual’s decisions concerning work and leisure affect the firm’s decision-making processes. 4. Problems here depend on how competitive markets are and timing of information flow. The Representative Consumer: Look at one and aggregate A. The consumer is assumed to have a utility function that determines the satisfaction derived from consumption and leisure, both are see as good, and called a consumption bundle. 1. The nature of utility has some sociology, some psychology, and a whole lot of basic economics. A. Preference Ordering : One of the key concepts in consumer theory is the nature of ordering such that people put things in order of preference and make decisions based on resources and these orderings. B. Four simple properties that allow an analysis of these orderings : 1. Complete: The consumer can rank all possible bundles of goods. 2. Transitivity: If A is preferred to B, and B is preferred to C, A is preferred to 3. More is Better (Non-Satiation): People are never satisfied, and will consume the max always, if you let them. 4. Diminishing Marginal Rate of Substitution: As you consume more of one good, the other good becomes more valuable to you as there is a tradeoff . C. Indifference Curves : The analysis of the consumption of two goods by an individual. 1. Need mathematical ideas here, and show graphs. 2. Indifference Map: Because of Non-Satiation idea and transitivity, two indifference curves cannot cross. 3. As your resources change, so does your potential utility. This is a shift inward (less resources) or outward (more resources) of the indifference curve.
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Slope of budget constraint: -P x /P y Slope of indifference curve is the marginal rate of substitution = MRS (Be careful: the book uses absolute values, do not do that) Consumer Equilibrium = MRS = change in y consumed/change in x consumed = -P x /P y The indifference curve is meant to be a representation of the consumer's preferences, views of the tradeoffs between two goods and also the belief in the substitutability of the two goods for each other. 2.
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lect3 notes - Econ 304 Sonoma State University Fall 2007 Dr...

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