3-Consumer Theory (I)

3-Consumer Theory (I) - 9/1/2010 Agenda Course Overview...

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9/1/2010 1 Agenda Course Overview Consumer Theory: Rational Choice Model Preferences Budget Constraints Consumer Choice Application: Gasoline rationing What To Take Away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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9/1/2010 2 Agenda Course Overview Consumer Theory: Rational Choice Model Preferences Budget Constraints Consumer Choice Application: Gasoline rationing What To Take Away We will develop a model of individual consumer behavior that will provide the foundation for our analysis of individual demand. By aggregating the individual demand of all consumers we will then be able to derive market demand. The model we derive is often called the “rational choice model”. It builds on a few simple premises: (i) consumers can rank in order of preference the options available to them, (ii) among those options available to them, consumers select the one with the highest ranking. This is a reasonable premise to develop a model of consumer decision making. Note however that we are implicitly assuming that consumers understand all available options and can consistently rank them. In a nutshell, the rational model starts from the premise that consumers choices are consistent and coherent . Consumer Behavior
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9/1/2010 3 People sometimes make incoherent choices: For instance you may prefer to see the Lakers rather than the Bulls, the Bulls rather than the Heat but prefer to see the Heat rather than the Lakers. Note that this ranking yields a circular reasoning . Psychologists have also argued that people suffer from several biases: if confronted with many options people may refuse to investigate each option and select the default option, they may suffer from status quo bias or they value a good differently if they own it rather than if they consider selling it. This is called the endowment effect. There is a branch of economics, called behavioral economics , that investigates the sources of inconsistent choices and its implications to the workings of economic institutions. Nevertheless, the rational choice model has proven a very solid model when applied to the general study of markets yielding testable predictions largely confirmed by data. Consumer Behavior Our goal is to characterize how a consumer ranks among different combinations of goods and which combination she chooses among the ones available to her given the relevant economic variables (prices, wealth, etc…).
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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3-Consumer Theory (I) - 9/1/2010 Agenda Course Overview...

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