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Econ306- chapter 3 outline

Econ306- chapter 3 outline - CHAPTER 3 ECON306 Theory of...

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CHAPTER 3 ECON306 Theory of Consumer Behavior The explanation of how consumers allocate incomes to the purchase of different goods & services. Best understood in 3 distinct steps: o Consumer preferences- 1 st step to find a way to describe why people prefer one good to another. See how preferences can be described graphically and algebraically o Budget constraints- 2 nd step to discover that limited incomes restrict the quantities of goods that consumers can buy. Put consumer preferences and budget constraints together o Consumer choices- consumers choose to buy combinations of goods that maximize their satisfaction. The quantity of goods consumers choose to purchase depend on their price Consumer Preferences Market Basket- a list with specific quantities of one or more goods. Contains food items in a grocery cart. Also refers to the quantities of food, clothing and housing that consumers buy each month. o Completeness o Transitivity- regarded as necessary for consumer consistency o More is better than less - consumers prefer more of any good to less of that good Indifference Curves- represents all combinations of market baskets that provide a consumer with the same level of satisfaction. That person is therefore indifferent amonth the baskets represented by the points on the curve. o Any market basket lying above and to the right of the indifference curve is preferred to any market basket on the curve o
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