M607-W10-Chapter_03

M607-W10-Chapter_03 - 3-1Chapter 3.A Consumer’s...

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Unformatted text preview: 3-1Chapter 3.A Consumer’s Constrained ChoiceMSci 607: Applied economics for management (winter 2010)Instructor: Bon KooThis chapter discusses the details of consumer’s behavior, which allows us to derive the demand function in chapter 4. The starting point of the consumer theory is that consumers maximize their utility given budget constraints. We first examine the utility function (or preference) and budget constraints, and then analyze how an individual consumer allocate their limited budget over many goods to maximize its utility, both graphically and mathematically. The basic calculus techniques are often used in the analysis and you need to review the appendix.3-21. Preference and utility function§What is your ultimate purpose of buying goods and services? •To get a satisfaction or pleasure.•Economists call this satisfaction as “utility,” and utility is based on people’s preference.§How do consumers choose the bundle of goods to buy?•Consumers may behave randomly and blindly choose one good without any thought.•However, real world data show that consumers appear to make systematic choices.•In economic analysis, consumers are assumed to make consistent and rational choices to maximize utility.•Then, we need a few fundamental assumptions (“axioms” or “postulates”) about consumers’ preference, as a starting point for the consumer analysis.§Properties of consumer preferences•CompletenessoA consumer can always rank several alternatives; i.e., any two bundles can be compared.3-31.1. Preference•Transitivity (or rationality)oConsumer’s preference is consistent over several bundles. oIf A is preferred to B and B is preferred to C, then A is preferred to C.oIf consumers are fully informed, this property holds in general.•Non-satiation (more-is-better)oMore of a commodity is better than less of it.oA goodis a commodity for which more is preferred to less. oA badis something for which less is preferred to more, such as pollution, congestion, etc.oWe focus on goods rather than bads. If consumers can freely dispose of excess goods, consumers can be no worse off with extra goods.•ContinuityoThis is a technical assumption to rule out sudden preference reversals for a small change....
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This note was uploaded on 02/16/2010 for the course MTH 10 taught by Professor Gail during the Spring '10 term at 4.1.

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M607-W10-Chapter_03 - 3-1Chapter 3.A Consumer’s...

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