Lecture%202%20-%20Consumer%20Theory%20Basics

Lecture%202%20-%20Consumer%20Theory%20Basics - Fin 580 FE...

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1 Fin 580 FE Financial Economics Lecture 2: Consumer Theory Basics Professor Nolan Miller
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2 Announcements Math review session on Friday. It is really intended as a refresher for those who think they need extra help. I don’t think that there are “special” math topics that will be necessary for the  course. If you are comfortable with basic calculus, you should be fine. Many people will not need it, and should feel free to skip it. Office hours today, 4:00 – 5:00.  Please try to come early if you are coming. Problem set #1 is available on Compass.  Due September 2.  May not be able to do  it all yet.
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3 What we did last time What is economics all about. Course objectives, administration, details.
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4 Lecture 2 Road Map Today we will cover the fundamentals of the economic approach to how  individuals (i.e., not firms) make decisions. Demand Curves Brief discussion before doing the formalities Consumer Theory Preferences Utility Budget Constraints Utility Maximization Problem (UMP) Demand Functions & Demand Curves Generalizing the solution
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5 Consumer Theory & Finance The theory of individual decision making under certainty and  uncertainty is at the core of modern finance. Consumer theory is not just about apples and oranges: Insurance Portfolio choice, demand for securities Mean and variance Savings and investments The basic theory will underlie the applications we do later. But, we start with apples and oranges!
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6 Demand: Quick and Informal The theory of demand focuses on the quantity of good a consumer  desires. Demand depends on: Price of good. Income. Prices of other goods. Lots of other things. Ceteris Paribus  (“other things the same”) Often we will ignore the other things if they remain fixed during the time  period of our analysis. Want to impress your friends at cocktail parties?  It’s pronounced  "KET- er-iss PAR-ih-buss” I have strange friends, and go to strange cocktail parties.
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7 Individual’s Demand Curve Graphical representation of demand as function of price of good. Note that the axes are backward! Quantity of gasoline (gallons) Price of Gasoline ($ per gallon)  P Q
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8 Change in quantity demanded As price of good changes, we “move along” the demand curve: P Q 4 1 2 3
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9 Change in Demand As other  factors change, we “shift” the demand curve Other factors change the relationship between price and quantity  demanded  at any price .
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This note was uploaded on 01/18/2011 for the course FIN fin580 taught by Professor Miller during the Spring '10 term at University of Illinois, Urbana Champaign.

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Lecture%202%20-%20Consumer%20Theory%20Basics - Fin 580 FE...

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