Section 01 _Consumers Part I_

# Section 01 _Consumers Part I_ - Consumers Part I (Section...

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1 Consumers Part I (Section 1) I. Tastes (Preferences) Important considerations: 1. Complete list of goods 2. Where, when, and under what circumstances Consumer bundle (for now assume two goods) x amount of good x y amount of good y consumer bundle is denoted (x,y) A. Assumptions, definitions, and some notation 1. Notation f : strictly preferred ( ) ( ) 2 2 1 1 , , y x y x f means: ~: indifferent ( ) ( ) 2 2 1 1 , ~ , y x y x means: ~ f : weakly preferred ( ) ( ) 2 2 ~ 1 1 , , y x y x f means: Ex : (Beer, Pizza) What does ( ) ( ) 2 , 3 3 , 2 f mean? What does ( ) ( ) 1 , 4 ~ 3 , 4 mean? Testing understanding : 1) What is true if ( ) ( ) 2 2 1 1 , , y x y x f and ( ) ( ) 1 1 2 2 , , y x y x f ? 2) What is true if ( ) ( ) 2 2 ~ 1 1 , , y x y x f and it is not the case ( ) ( ) 1 1 2 2 , ~ , y x y x ?

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2 2. Definitions Goods - Items which consumers would prefer more to less (Exs: ice cream…) (for the rest of the course we will assume beer and pizza are goods) Bads - things consumers don’t like (they would prefer less to more) 3. Assumptions Complete - two bundles can be compared ( ) ( ) 2 2 ~ 1 1 , , y x y x f , or ( ) ( ) 1 1 ~ 2 2 , , y x y x f , or both Reflexive - Any bundle is at least as good as itself ( ) ( ) 1 1 ~ 1 1 , , y x y x f Transitivity - If ( ) ( ) 2 2 ~ 1 1 , , y x y x f , and ( ) ( ) 3 3 ~ 2 2 , , y x y x f then ( ) ( ) 3 3 ~ 1 1 , , y x y x f - For certain things transitivity does not have to hold, but for other things it must Ex of why transitivity must hold - Spse a person prefers apples to oranges and oranges to plumbs and plumbs to apples. How could you turn this person into a “money pump”?
3 B. Indifference curves (ICs) 1. Introduction IC - consumption bundles that consumer is indifferent between. Graphing consumers bundles - How do we know B f A ? - Does consumer like A or D better? - If we want to form baskets that consumer likes exactly the same as A (Baskets ~ A) where don’t we look? Northeast of A: Southwest of A: - Where do we look? Ex of how IC may look : Reminder: Consumers like every bundle on IC equally! C B C A B A ~ ~ ~

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4 2. Some properties of IC a) - Consumers prefer IC 1 to IC 2 - Prove consumers prefer A to B b) There are an infinite number of indifference curves (fill up whole plane) c) Indifference curves cannot cross “Proof” (words):
5 3. MRS Marginal rate of substitution of X in terms of Y (MRS X,Y ) (The book calls it the marginal value of X in terms of Y) How many units of Y consumer is willing to give up for one unit of X. (and be equally well off) Exs : Spse MRS beer,pizza =5 what does this mean? Extension: What is MRS pizza,beer = - The MRS will be different on different parts of the IC - The MRS X,Y is the absolute value of the slope of the IC Slope= ( )~( )

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6 4. Shapes of IC - IC are usually convex Why? DMRS - A to B lots of beer few pizzas MRS beer,pizza = - C to D few beers lots of pizzas MRS beer,pizza = - a to b lots of pizzas few beers MRS pizza, beer = - a to b lots of beer few pizzas MRS pizza, beer =
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## This note was uploaded on 12/27/2011 for the course ECON 302 taught by Professor Ahmad,y during the Fall '08 term at Wisc Whitewater.

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Section 01 _Consumers Part I_ - Consumers Part I (Section...

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