{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

eco200_consumertheory_fall2009

# eco200_consumertheory_fall2009 - ECO 200 Microeconomic...

This preview shows pages 1–5. Sign up to view the full content.

ECO 200: Microeconomic Theory Lecture notes on Consumer Theory 1 Fall 2009 Carlos J. Serrano 1 Lecture notes updated on Sept. 10, 2009 at 10.35am. 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
1 ConsumerTheory Summary Consumer preferences. Axioms of choice Indifference curves Utility function Marginal rate of substitution Consumer choice Budget set and budget line Optimal consumption bundle Demand Individual demand What are the effects of the change in the price of a good: income and substitution effect? What are the effects of a change in income? Market demand, elasticities and network externalities Revealed preference 2
1.1 Consumerpreferences Elements of a decision problem (1. consumption set, 2. consumption bundle and 3. pref- erence relation). The starting point for any decision problem is a set of possible (mutually exclusive) alternatives from which individuals must choose. We denote this set by X . For the time being, this set can be anything. For instance, X = {going to work, go to college, become a soccer player}; or X = { x R 2 + } , where x is a vector of 2 components representing the number of units of food and clothes that you might consume. Consequently, we will generally denote X as the consumption set. Definition1 A consumption set is the set of possible (mutually exclusive) alternatives from which individuals must choose. We will denote as a consumption bundle or basket every alternative in the consumption set. Definition2 A basket or a bundle is a collection of goods and services than an individual might consume. Example: x =(2 , 4) i.e., 2 units of food and 4 units of clothing; y =(1 , 1); z =(5 , 1); r =(3 , 1); s =(1 , 5) . We can generalize these examples allowing for bundles with N components, where N can be very large. For simplicity we will use N =2 . The next element defining an individual decision problem are the decision maker’s tastes, or preference relations . In our approach to modelling the process of individual decision choice the preference relations are the primitive characteristic of the individual. Definition3 A preference relation, denoted by followsequal , is an indication of how a consumer would rank two possible baskets. We read x followsequal y as " x is at least as good as y ". From followsequal we can obtain two other important relation on the consumption set X. (i) Strict preference relation, follows , defined by x follows y if and only if x followsequal y but not y followsequal x. We read x follows y as " x is stricly preferred to y ". (ii) The indifference relation, , defined by x y if and onfly if x followsequal y and y followsequal x. We read x y as " x is indifferent to y ". 3

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Note that every binary relation, like a preference relation, is an ordinal preference relationship. In an ordinal preference order, we can rank elements but we cannot tell "the amount by which I like more a bundle than another one".
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 34

eco200_consumertheory_fall2009 - ECO 200 Microeconomic...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online