Chapter 4

Chapter 4 - Chapter 4 Tastes and Indifference Curves...

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Unformatted text preview: Chapter 4 Tastes and Indifference Curves Individuals try to do the best they can given their circumstances. 1 This was our starting point when we introduced the topic of microeconomics in Chapter 1, and we have devoted the intervening chapters to the question of how to model individual circumstances — what we called choice or budget sets. Choice sets do not tell us what individuals will do — only all the possible actions they could take. Put differently, knowing what our choice sets are is a necessary first step to finding what choices are best but it is not sufficient . To determine what an individual will actually do when presented with a given choice set, we need to know more about the individual and about his or her tastes. This is tricky — both because tastes differ enormously across people and because they are difficult to observe. I hate peanut butter but my wife loves it, and she hates fish which I cannot get enough of. Clearly we will make very different choices when faced with exactly the same choice set over fish and peanut butter, but it is difficult for an economist to look at us and know how much we like different goods without observing our behavior under different circumstances. 2 The good news is that there are some regularities in tastes that we can reasonably assume are shared across most people, and these regularities will lead us to be able to make predictions about behavior that will be independent of what exact tastes an individual has. Furthermore, economists have developed ways of observing choices that individuals make and then inferring from these choices what kinds of tastes they have. We will therefore be able to say a great deal about behavior and how behavior changes as different aspects of an economy change. First, however, we have to get comfortable with what it is that economists mean when we talk about tastes. 4A The Economic Model of Tastes In the previous two chapters, we described a choice set as a subset of all possible combinations of goods and services — the subset that is affordable given an individual’s particular circumstances. In our example of me going to Wal-Mart to buy shirts and pants, for instance, we used the information we had on the money I had available and the prices for shirts and pants to delineate the budget line in the larger space of all combinations of shirts and pants. While I was unable to afford bundles of 1 No prior chapter required as background for this chapter. 2 OK – maybe I eat so much fish that I smell a lot like fish – but we probably don’t want to build a model about tastes by smelling people. 82 Chapter 4. Tastes and Indifference Curves shirts and pants outside the choice set, I may nevertheless dream about bundles outside that set — or put differently, I may nevertheless have tastes for bundles outside the choice set. For instance, I get deeply annoyed at the crammed conditions on commercial airplanes and have long dreamed of getting myself a private plane modeled after Air Force 1. Unless Oprah invites me on her showof getting myself a private plane modeled after Air Force 1....
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This note was uploaded on 05/13/2010 for the course ECON 105D taught by Professor Cur during the Fall '09 term at Duke.

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Chapter 4 - Chapter 4 Tastes and Indifference Curves...

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