CHAPTER 3A UTILITY S12

CHAPTER 3A UTILITY S12 - OUTLINE OF LECTURE ECON 306...

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1 © Charles R. Hulten 2011 1 ECON 306 CHAPTER 3 PART A THE UTILITY FUNCTION © Charles R. Hulten 2011 2 OUTLINE OF LECTURE FRAME OF REFERENCE AXIOMS OF CHOICE INDIFFERENCE CURVE UTILITY FUNCTION MARGINAL RATE OF SUBSTITUTION CRITIQUE © Charles R. Hulten 2011 3 CIRCULAR FLOW DIAGRAM: UTILITY FUNCTION & BUDGET CONSTRAINT PRODUCERS CONSUMERS PRODUCT MARKET FACTOR C d s L d s C C L L Revenue P ×C Expenditure Income Cost P ×L c L P L P ×L L P ×C c P c © Charles R. Hulten 2011 4 BEHIND THE DEMAND CURVE CONSUMER CHOICE CONSUMER CONSTRAINT
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2 © Charles R. Hulten 2011 5 The Utility Function and Choice Life involves making choices, as, for example: What school to attend Selection of a major Choice of career Choice based on preference among alternatives Preference shaped by individual psychology and personal experience, as well as by social norms Economics takes preferences as given, and associates preference with utility, variously conceived © Charles R. Hulten 2011 6 ASSUMPTIONS ABOUT CONSUMER CHOICE NEEDED TO DERIVE THE DEMAND CURVE COMPLETENESS: – For all alternatives A and B, either A > B, or B > A, or A ~ B TRANSITIVITY –I f A > B, and B > C, then A > C f A ~ B, and B ~ C, then A ~ C NON-SATIATION: – There is always a B such that B > A © Charles R. Hulten 2011 7 WHERE WE ARE HEADED THE FOLLOWING SEQUENCE OF SLIDES SHOW HOW THE UTILITY FUNCTION IS DERIVED FROM THE THREE AXIOMS OF CHOICE © Charles R. Hulten 2011 8 EVERY POINT IN X - Y SPACE DEFINES A BUNDLE OF GOODS Good X Good Y A 8 6
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3 © Charles R. Hulten 2011 9 BUNDLES (POINTS) B AND C ARE PREFERRED TO A BECAUSE THEY
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CHAPTER 3A UTILITY S12 - OUTLINE OF LECTURE ECON 306...

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