Econ306 Chapter 3

Econ306 Chapter 3 - Econ306 Chapter 3 Solving two problems...

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Econ306 Chapter 3 Solving two problems involving corporate policy and other public policy involved an understanding of the theory of consumer behavior: explanation of how consumers allocate incomes to the purchases of different goods and services Consumer preferences: find a practical way to describe the reasons people might prefer one good over another Budget constraints: take into account limited incomes which restricts the quantities of goods consumers can buy Consumer choices: given preferences and limited incomes, consumers buy combinations of goods that maximize their satisfaction Market basket (bundle): list with specific quantities of one or more goods Items in a market basket are described as items Completeness: preferences are assumed to be complete; consumers can compare and rank all possible baskets Transitivity: preferences are transitive, meaning that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer prefers A to C More is better than less: goods are assumed to be desirable; consumers always prefer more goods to less Indifference curves: represents all the combinations of market baskets that provide a consumer with the same level of satisfaction. Person is indifferent. Any market basket above and to the right of the indifference curve is preferred to any market basket on the curve Indifference map: graph containing a set of indifference curves showing market baskets among which a consumer is indifferent Indifference curves can not intersect The fact that indifference curves slope downward follows directly from our assumption that more of a good is better than less. If the indifference curve sloped upward, a consumer would be indifferent between the two market baskets even though one of them had more of both The shape of an indifference curve describes how a consumer is willing to substitute one good for another
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Econ306 Chapter 3 - Econ306 Chapter 3 Solving two problems...

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