Lecture2_620 preferences

Lecture2_620 preferences - DB 802 Advanced Economics...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Chaiyuth Punyasavatsut 2011 1 Lecture 2: Consumer Theory Concepts:Preferences, Utility, UMP, Indirect and Expenditure function, Demand function and its properties DB 802 Advanced Economics
Background image of page 1

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

View Full DocumentRight Arrow Icon
Chaiyuth Punyasavatsut 2011 2 applications If you introduce a new product, how much should it charge? To answer, we need to know more about consumer preferences and their behaviors. Able to explain how consumers allocate incomes to the purchase of different goods and services.
Background image of page 2
Chaiyuth Punyasavatsut 2011 3 Part 1: graphical approach From Pindyck and Rubinfeld, chapter 3
Background image of page 3

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

View Full DocumentRight Arrow Icon
Chaiyuth Punyasavatsut 2011 4 Consumer Choice Total utility is maximized when the budget is allocated so that the marginal utility per dollar of expenditure is the same for each good. C C F F P MU P / /
Background image of page 4
Chaiyuth Punyasavatsut 2011 5 Summary People behave rationally in an attempt to maximize satisfaction from a particular combination of goods and services. Consumer choice has two related parts: the consumer s preferences and the budget line.
Background image of page 5

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

View Full DocumentRight Arrow Icon
Chaiyuth Punyasavatsut 2011 6 Summary Consumers make choices by comparing market baskets or bundles of commodities. Indifference curves are downward sloping and cannot intersect one another. Consumer preferences can be completely described by an indifference map.
Background image of page 6
Chaiyuth Punyasavatsut 2011 7 Summary The marginal rate of substitution of F for C is the maximum amount of C that a person is willing to give up to obtain one additional unit of F. Budget lines represent all combinations of goods for which consumers expend all their income. Consumers maximize satisfaction subject to budget constraints.
Background image of page 7

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

View Full DocumentRight Arrow Icon
Chaiyuth Punyasavatsut 2011 8 Part 2: mathematical approach From Jehle and Reny, chapter 1. Consumer Theory
Background image of page 8
Chaiyuth Punyasavatsut 2011 9 1.1 Notations x = (x 1 , x 2 , . .. x n ) ; a consumption bundle/plan x i represents the number of good i x X, a consumption set; X = Assumption 1.1: Properties of X. X is closed, convex, can be zero. B is a feasible set X Behavior Assumption: consumer chooses choice that is most preferred n
Background image of page 9

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

View Full DocumentRight Arrow Icon
Chaiyuth Punyasavatsut 2011 10 1.2 Preferences and Utility of consumers 1.2.1. Preferences Relations over X 1. We start with axioms of consumer choice to make sure his choice can be made and consistent. 2. A binary relation notation: If x 1 x 2 , we say that “x 1 is at least a good as x 2 .”. Consumers compare two plans at a time and then make a decision.
Background image of page 10
Chaiyuth Punyasavatsut 2011 11 1.2.1. Preferences Relations 2. Two Axioms for preference relation A1:Completeness implies consumers can compare his choices. Either x 1 x 2 , or x 2 x 1 A2:Transitivity implies consistent choices. If x 1 x 2 and x 2 x 3 then x 1 x 3
Background image of page 11

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

View Full DocumentRight Arrow Icon
Chaiyuth Punyasavatsut 2011 12 1.2.1. Preferences Relations Strict preference relation use Indifference relation use ~ With all these preference relations, we know that, we can rank any two plans: x 1 x 2 or x 2 x 1 or x 1 ~ x 2 Now, let think of two-goods case, pick a point x 0 , and we can compare it to all other points by graphing these sets of preferences satisfying all axioms.
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/20/2011 for the course OPR 201 taught by Professor Pp during the Spring '11 term at Thammasat University.

Page1 / 50

Lecture2_620 preferences - DB 802 Advanced Economics...

This preview shows document pages 1 - 13. Sign up to view the full document.

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