Comm 295 - Class 4 Notes

Comm 295 - Class 4 Notes - Comm 295 Consumer Theory(4.1-4.5...

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Comm 295 Consumer Theory (4.1-4.5) 4.1 CONSUMER PREFERENCES PROPERITES OF CONSUMER PREFERENCES 1. Completeness - When facing a choice between any two bundles of goods, a consumer can rank them so that: o Consumer prefers first bundle to second, or o Consumer prefers second bundle to first, or o Consumer likes both bundles equally and is INDIFFERENT - Indifference is allowed, indecision is not 2. Transitivity - Weak preferences o If weakly prefers A > B, and weakly prefers B > C, then consumer weakly prefers A > C - Indifference is transitive o If indifferent between A and B, and indifferent between B and C, must be indifferent between A and C - Strict preference o If strictly prefers A > B, and strictly prefers B > C, then must strictly prefer A > C - Transitivity is necessary for rational behaviour 3. More Is Better - Assumes that more of a good is better than less (greed) o Good : a commodity for which more is preferred to less, at least at some levels of consumption o Bad : something less preferred to more (eg pollution) PREFERENCE MAPS - Graphical interpretation that summarizes info about a consumer’s preferences Preferences and Indifference Curves Indifference curve : the set of all bundles of goods that a consumer views as being EQUALLY desirable Indifference map or ( preference map ): a complete set of indifference curves that summarize a consumer’s tastes - Each line shows points (combination of goods) with the same utility or well-being o Bundles on curves farther from origin are preferred to those closer to origin more-is-better property o There is an indifference curve through every possible bundle completeness assumption o Indifference curves cannot cross a given bundle cannot be on 2 indifferent curves o Indifference curves slope downward cannot be indifferent between A and B and strictly prefer B > A Willingness to Substitute Between Goods Marginal rate of substitution ( MRS
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This note was uploaded on 12/07/2011 for the course COMM 295 taught by Professor Ratna during the Winter '09 term at UBC.

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Comm 295 - Class 4 Notes - Comm 295 Consumer Theory(4.1-4.5...

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