Econ301_week2

Econ301_week2 - Econ 301 Intermediate Microeconomics Week...

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Econ 301 Intermediate Microeconomics Week 2, Jun 21-Jun 25 Jingbo Cui (ISU) Econ 301-Summer 2010 Week 2, Jun 21-Jun 25 1 / 60 Outline 1 A Consumer’s Constrained Choice (Ch.3) Preferences Budget Constraint Constrained Consumer Choice 2 Demand (Ch.4) Deriving Demand Curves Effects of an Increase in Income Effects of a Price Increase Jingbo Cui (ISU) Econ 301-Summer 2010 Week 2, Jun 21-Jun 25 2 / 60
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A Consumer’s Constrained Choice (Ch.3) Preferences Individual Decision Making Consumer’s purchases decision over SUVs and small vehicles, relatively fewer SUVs and more small cars. Do these reflect a taste change or a response to higher gas price? How can we uses this information about consumer’ allocations of their budgets to predict how a price change will affect their demands today? Are consumers better off receiving cash or a comparable amount in food stamps? Jingbo Cui (ISU) Econ 301-Summer 2010 Week 2, Jun 21-Jun 25 3 / 60 A Consumer’s Constrained Choice (Ch.3) Preferences Premises of Consumer Behavior To answer question about individual decision making, we need to model individual behavior which is based on the following premises: Individual preferences describe how much pleasure people derive from the goods and services they consume. Consumers face constraints or limits on their choices. Consumers maximize their well-being or pleasure from consumption, subject to the constraints they face. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 2, Jun 21-Jun 25 4 / 60
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A Consumer’s Constrained Choice (Ch.3) Preferences Properties of Preferences I We start out analysis of consumer behavior by examining consumer preferences.Using the following assumptions, we make many predictions about preferences: Completeness ( ± ) A, or B, or indifferent ( ). i.e. tell me your preference over ice cream and cake.ice cream ± cake, or cake ± ice cream, or cake ice cream. Transitivity : consumer’s preference over bundles is consistent. If a consumer weakly prefers ( ² ) good A to good B,and weakly prefers good B to good C, then the consumer also weakly prefers good A to good C. i.e. suppose ice cream ² cake, and cake ² candy bar, then ice cream ² candy bar. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 2, Jun 21-Jun 25 5 / 60 A Consumer’s Constrained Choice (Ch.3) Preferences Properties of Preferences II More is better (nonsatiation) , literally, more of a commodity is better than less of it. A good is defined as a commodity for which more is preferred to less. A bad is defined as something for which less is preferred to more, i.e. pollution. Continuity : if a consumer prefers bundle A to bundle B, then the consumer prefers bundle C to B if C is very close to A.
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Econ301_week2 - Econ 301 Intermediate Microeconomics Week...

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