consumers_choice_1 - Microeconomics I Consumers Choice...

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Click to edit Master subtitle style Microeconomics I Consumer’s Choice. Preferences. Utility.
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Consumers Utility and Choice Preferences Utility and indifference curves Equilibrium Constrained consumer choice
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Model of Consumer Behavior To answer questions about individual decision making we need a model of individual behavior It is based on the following premises: Individual tastes or preferences determine the amount of pleasure people derive from the goods and services they consume Consumers face constraints or limits of their choices Consumers maximize their well-being or pleasure from consumption, subject to the constraints they
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Micro approach to the consumer Perfectly rational consumers pursue their self interest What a consumer wants (preferences) What a consumer can afford (budget) What a consumer consumes (choice)
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Defining Products Almost anything can be considered a “good” (aka “product”, “service”, “commodity”) Ø Can be measured in physical units (e.g. tons, meters, bytes) Ø There are also “bads” (e.g. pollution, traffic, noise) (Good – a commodity for which a more is preferred to less, at least at some levels of consumption
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Defining Products (cont.) We refer to an array of different goods as a bundle E.g. so much books, so much CD’s, etc. Other distinctions Durable or perishable Final vs. Intermediate
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Preferences Start with how each consumer evaluates different (actual and hypothetical) consumption options It is not important where a consumer preferences come from: upbringing, prior consumption, advertising
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Properties of Consumer Preferences Three key assumptions of rational behavior : 1. Completeness – consumer can make a decision Either a preferred to b or b preferred to a or indifferent 2. Transitivity – consumer is consistent If a preferred to b and be preferred to z then a preferred to z 3. More is Better ( monotonicity ) – consumer prefers
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Rational Behavior? Limitation of homo economicus Interdependencies – how other rank bundles (snob effects etc.) Habit formation – preferences depends of how much of good consumer consumed in the past
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Preference maps Indifference curve – the set of all bundles of goods that a consumer views as being equally desirable. All
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