Topic3_intmicro_preferences_Part_1_TW

# Topic3_intmicro_preferences_Part_1_TW - TOPIC 3 PREFERENCES...

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Dr. Fidel Gonzalez (SHSU) TOPIC 3: PREFERENCES INTERMEDIATE MICROECONOMICS Spring 2011 Dr. Fidel Gonzalez Department of Economics and Intl. Business Sam Houston State University

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In the previous topic we explore the issue of affordability and the budget of the consumer. Remember that our main assumption is: The consumer is going to buy the best combinations of goods that she can afford. The two main concepts are AFFORD and BEST. Since we covered AFFORD before now we are going to move to BEST. Remember that BEST refers to what makes the consumer the happiest. That is, a combination of x1 and x2 is considered BEST is that combination makes our consumer the happiest possible. The only way to know if a combination of x1 and x2 make the consumer happy is by looking at her preferences. Once we understand consumer’s preferences then we know what makes her the happiest.
The following diagram will help you see what we are doing. The consumer is going to buy the best combinations of goods that she can afford. BEST AFFORD BUDGET PREFERENCES Remember two ingredients: preferences and budget to explain the consumer’s choices. WE HAVE COVERED BUDGET ALREADY NOW WE MOVE ON TO PREFERENCES Covered this in the previous section Now we will cover preferences

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NOTATION In addition to the notation we have used before we will use some new notation that is important that you are familiar with. 1) Bundle : combination of x1 and x2 will be represented as follows: Bundle A = (x1=10, x2=20) or to simplify things A = (10, 20) remember that the first term in the parenthesis refers to the amount of x1 in the bundle and the second term refers to the amount of x2. 2) means weakly preferred (it is similar to the symbol in math) 3) means strongly preferred (it is similar to the < symbol in math) 4) means indifferent (it is similar to the = symbol in math)
C G means that G is strongly preferred over C. This implies that the consumer prefers bundle G over C. A B means that the bundle B is weakly preferred over bundle A. This implies that the consumer prefers bundle B over A or that she is indifferent between the two bundles. Another better way to see it is to say that A is never better than B (they are either equal or B is better). F K means that the consumer is indifferent between bundle F and K. In other words, you can give the consumer F or K and she will be equally happy. Some more examples H L H is preferred over L T M M is never better than T M J M is indifferent to J

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Now that we understand the notation we can move on to preferences. PREFERENCES ASSUMPTIONS We are going to consider five assumptions about the preferences of the consumer. It is very important that you know them. 1) Completeness 2) Reflexive 3) Transitivity 4) More is better (also known as monotonicity or nonsatiation) 5) Convexity These five assumptions about preferences will allow us to narrow things down and simplify our analysis of consumer’s preferences.
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