Notes-03_Preferences-2

# Notes-03_Preferences-2 - Econ 3130 Spring 2012 R Masson...

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Econ 3130, Spring 2012, R. Masson Chapter 3: p. 1 Chapter 3: Preferences I. Introduction to what Varian calls this chapter: “Preferences” A. I would have called this a chapter on “ indifference curves 1. This chapter starts with “preference orderings,” but mostly focuses on a graphical representation consistent with these orderings in two good worlds. This graphical representation is called “indifference curves.” Chapter 4 looks at a mathematical representation of these indifference curves which can be generalized to more than two goods. So, “preference orderings” generate two tools, indifference curves (two good worlds) and Utility functions (N good worlds, N ± 1). Chapter 4 is called “Utility” and the parallel modeling concept is “Indifference Curves.” a. That is, indifference curves and utility functions are two ways of representing “preferences” 2. Preference Orderings ” can be thought of as choice rankings between one, two, three or more options. Although economists use the term “preference” to describe these orderings, these can be programmed into a computer (e.g., an android like Commander Data, can be programmed to have “preference orderings”), to make choices but not have meaningful “preferences” 3. Chapter 5 is called “Choice” . This chapter combines the concepts of indifference curves and/or utility theory to describe how choices may be modeled given the Budget Constraint from Chapter 2. 4. Chapter 6 on Demand then takes the concepts of chapter 5 and breaks them down into useful distinctions for a variety of different uses. E.g., using the analogy to theory as “maps,” chapter 6 is something like “If you are interested in wine tasting, there is the winery map, but if you are interested in hiking, there is the hiking trails map.” 5. The Chapters following 6 then look at variants on the theme B. The above “maps” the direction of the next few chapters/lectures following today

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Econ 3130, Spring 2012, R. Masson Chapter 3: p. 2 II. Some Terms A. “ Consumption Bundle ”: In 2-space, any/all specific quantities {x 1 ,x 2 } (or {x,y} with a composite commodity or Marshallian Money) a. In N-space we would have {x 1 ,x 2 ,...,x N } or {x 1 ,x 2 ,...,x N-1 ,y} 2. Note, I am now using x not q as my non-monetary quantity of product 3. Example, {x,y}={10,100} means having ten units of x and spending (optimally) \$100 on all other goods where “optimally” is not well defined before Chapter 5 B. We want to know what a consumer chooses in terms of quantities to consume in some specific situation 1. The concept is static, it applies to a specific situation. a. For example, my preferences for Bacon versus Softshell Crabs are different at 8:00 AM than at Dinner time 2. But defining the situation leads to flexibility. For example the time frame may be varied by appropriate definition a. For example, the 8:00 AM and dinner time choices may reflect choices sitting down with a menu at each of these two times. But as an alternative, I could be
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