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section3_1 - Department of Economics University of...

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Department of Economics University of California, Berkeley ECON 100A Spring 2010 - Section 3 GSI: Antonio Rosato 1 Consumer Behavior After describing generally what is a market, and how supply and demand “meet” to form equilibrium, our next step will be looking into what underlies and creates consumer demand. A subsequent step will be of course looking into what underlies and creates supply. The analysis becomes very technical from the beginning; but when facing a problem, we can always try and take a step back from the math and the graphs and think: “how would this look like in real life?” One simplification we will use from the beginning of our treatment of consumer behavior is restricting the market to only two products (goods) consumed. This is done to enable us to do a two-dimensional graphical analysis, and makes life easier in general. 1.1 Preferences The first thing we want to describe are consumer preferences. We will be looking at two possible consumption goods, and we will follow the example in the textbook, of clothing and food. A consumer’s choice of how much to buy of each is called a bundle, and can be described by a point on the clothing-food (C and F) system. Describing consumer preferences means saying whether a consumer prefers one bundle to another. We will denote bundles by capital letters: A, B, D, E, G, H... We make these assumptions about preferences: 1. Completeness – given any two bundles, the consumer will always be able to say whether he prefers one to the other or is indifferent between them. 2. Transitivity – if A is preferred to B , and B is preferred to D , then A is preferred to D . this ensures consistency of preferences. 3. More is better than less. If one bundle has more of the goods than the other, even just a little bit, it is preferred. We can represent preferences using indifference curves. Indifference curves tell us between what bundles the consumer is indifferent, and also which ones he prefers to others. We assume that indifference curves slope down from left to right and that utility increases as we go up and to the right.
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