ECN 203 (2), Modeling Individual Choice

ECN 203 (2), Modeling Individual Choice - Chapter 2:...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 2: Modeling Individual Choice Purposes of Chapter Venture into microeconomics. Examining the economic decision process of consumers, a key component of the economic decision process of firms, and several complexities in modeling human behavior.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Another Economic Fundamental: Rationality Rationality – the behavior of economic units (i.e. individuals, firms, government) reflects the pursuit of an underlying goal.
Background image of page 2
The “Underlying Goals” in Rational Economic Behavior Based upon values, what the economic unit (consumer, firm, government) holds to be important. Varies across different units. Typically includes one or more constraints, reflecting scarcity. Generally phrased in terms of “maximizing” or “minimizing,” possibly subject to (constraint).
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Individual Choice in Buying Goods:Theory Individuals want to be as happy as possible. Individuals gain happiness from the consumption of goods. The more consumption the better, at least to a satiation point. The happiness we gain becomes less and less as we consume more and more of any good.
Background image of page 4
Individual Choice in Buying Goods:Model Utility – happiness that individuals feel (measured in “utils”). Utility – caused by levels of the various goods that we consume. Utility Function – A explicit relationship which specifies the level of utility based upon the amounts of all the goods that we consume.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Marginal Utility Marginal Utility (MU) -- the change in utility (U) resulting from a change in the quantity of an individual good (Q) consumed. In mathematical terms, MU = ΔU/ΔQ.
Background image of page 6
Positive and Diminishing Marginal Utility The more consumption the better, i.e. Q U , Positive Marginal Utility The happiness we gain becomes less and less as we consume more and more of any good i.e. Q MU , Diminishing Marginal Utility
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Utility and Marginal Utility: An Example Suppose I get utility from consuming coffee (and other goods). Suppose my utility from coffee, holding consumption of all other goods constant, looks as follows.
Background image of page 8
My Utility From Coffee (All Other Goods Constant) Coffee (Cups) Utility (Utils) 0 0 1 100 2 185 3 245 4 295 5 325 6 340 7 340 8 320
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
My Marginal Utility From Coffee (All Else Constant) Coffee (Cups) Utility Marginal Utility 0 0 -- 1 100 100 2 185 85 3 245 60 4 295 50 5 325 30 6 340 15 7 340 0 8 320 -20
Background image of page 10
Ceteris Paribus Ceteris Paribus – Latin term, meaning
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 36

ECN 203 (2), Modeling Individual Choice - Chapter 2:...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online