Lecture 04 - ECO100 - Introduction to Economics Lecture 4:...

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ECO 100Y Introduction to Economics Lecture 4: Consumer Behaviour © Gustavo Indart Slide 1
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Consumer Behaviour ± Why do demand curves have a negative slope? ± To answer this question we must study the behaviour of individual households or consumers ± In order to explain how households make their choices we will examine neoclassical indifference theory ± Suppose that John has a monthly income of $30 which he entirely spends on two commodities: movies and donuts. Movies cost $6 a ticket and donuts cost $3 a dozen ¾ How does John divide his $30 between movies and onuts? © Gustavo Indart Slide 2 donuts?
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Preferences ± In order to explain how households make their choices we will examine neoclassical indifference theory ± Let’s first introduce the concept of preferences e a person’s likes and dislikes ¾ Preferences are a person s likes and dislikes ± There are three fundamental assumptions about references: preferences: ¾ Preferences do not depend on the prices of the goods ¾ Preferences do not depend on income ¾ More of any good is preferred to less of that good © Gustavo Indart Slide 3
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Preferences (continued) ± Let’s consider how John’s decision about how to divide is monthly income of $30 between movies and donuts his monthly income of $30 between movies and donuts ¾ John consumes only movies and donuts, that is, he ts satisfaction only from consuming these two gets satisfaction only from consuming these two commodities we don’t take into account income and prices John ± If we don t take into account income and prices, John may consider infinite combinations of movies and donuts for consumption ± In this way, he is able to arrange an infinite number of bundles according to his order of preference © Gustavo Indart Slide 4
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Preferences (continued) ± John may indicate, for instance, that he prefers bundle A (2 ovies and 5 dozens of donuts) to bundle movie and movies and 5 dozens of donuts) to bundle B (1 movie and 10 dozens of donuts) ± This means that he obtains greater utility or satisfaction from consuming bundle A than from consuming bundle B ± He may also indicate that he is indifferent between consuming bundle C (3 movies and 10 dozens of donuts) and bundle D (4 movies and 5 dozens of donuts) ± This means that he obtains the same utility or satisfaction from consuming either bundle C or bundle D © Gustavo Indart Slide 5
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difference Curves Indifference Curves ± If we put together all the combinations of movies and donuts that allow John to attain the same level of utility or satisfaction, we construct an indifference curve ± John is indifferent between any two points on this curve ± Given the assumption about preferences that more is preferred to less, indifference curves satisfy two nditions: conditions: ¾ Their slopes are negative hey cannot intersect © Gustavo Indart Slide 6 ¾ They cannot intersect
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Negative Slope of an The assumption that more is preferred to less assures that e indifference curve will have Indifference Curve D
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Lecture 04 - ECO100 - Introduction to Economics Lecture 4:...

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