L2Preferences - 1 Introduction to Microeconomics Lecture 2 Lecture 2 Preferences Utility and Choice Simon Cowan Outline z Preferences z Utility

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Unformatted text preview: 1 Introduction to Microeconomics Lecture 2 Lecture 2 Preferences, Utility and Choice Simon Cowan Outline z Preferences z Utility functions z Indifference curves z Examples of common utility functions z Using utility theory to model household choices: utility maximization and the budget constraint Preferences: what do households care about? z We think of households or consumers as having given preferences over bundles of goods z Goods/services are interpreted broadly: z current goods, e.g. films and meals out z saving v. spending now: good 1 is spending now, good 2 is spending in the future z Time spent at leisure, and consumption of goods and services z Examples of bundles: z x = {3 apples, 2 bananas}, y = {2 apples, 4 bananas} The basic preference relations z x is strictly preferred to y : xPy z y is strictly preferred to x : yPx z Indifference: x and y are “indifferent”: xIy z x is preferred to y means either strict preference or x is preferred to y means either strict preference or indifference: xRy . z In fact strict preference and indifference can be defined in terms of the preference relation, R, and “not”. z xPy if and only if xRy and not xIy z xIy if and only if xRy and yRx Three assumptions about preferences 1. Completeness: all possible bundles can be compared 2. Reflexivity: xRx . All bundles are at least as good as themselves (not a very exciting property) 3. Transitivity: if xRy and yRz then xRz . z Those of you doing Logic will later learn about the logic of relations. z Preference, R , is a relation which is analogous to the “greater than or equals” relation for numbers, which is always reflexive, transitive and complete. z Indifference, I , is a relation which is reflexive, symmetric and transitive. Analogous to “equals”. z Strict preference, P , is a relation which is irreflexive, asymmetric and transitive. Analogous to “greater than”. Representation by a utility function z Preferences satisfying the three assumptions can be represented by a utility function z The utility function is denoted by u (.) and its domain is the set of bundles z If xPy then u (...
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This note was uploaded on 04/12/2010 for the course ECON DEAM taught by Professor Vines during the Spring '10 term at Oxford University.

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L2Preferences - 1 Introduction to Microeconomics Lecture 2 Lecture 2 Preferences Utility and Choice Simon Cowan Outline z Preferences z Utility

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