Chapter 03 - 03.03.2011 Chapter 3 A Consumers Constrained...

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03.03.2011 1 Chapter 3 A Consumer’s Constrained Choice If this is coffee, please bring me some tea; but if this is tea, please bring me some coffee. Abraham Lincoln ECON201 Spring 2011 3-2 Chapter 3 Outline 3.1 Preferences 3.2 Utility 3.3 Budget Constraint 3.4 Constrained Consumer Choice 3.5 Behavioral Economics ECON201 Spring 2011 3-3 Chapter 3: Model of Consumer Behavior Premises of the model: 1.Individual tastes or preferences determine the amount of pleasure people derive from the goods and services they consume. 2.Consumers face constraints , or limits, on their choices. 3.Consumers maximize their well-being or pleasure from consumption subject to the budget and other constraints they face. Examples.
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03.03.2011 2 ECON201 Spring 2011 3-4 3.1 Preferences To explain consumer behavior, economists assume that consumers have a set of tastes or preferences that they use to guide them in choosing between goods. Goods are ranked according to how much pleasure a consumer gets from consuming each. Preference relations summarize a consumer’s ranking is used to convey strict preference (e.g. a b ) is used to convey weak preference (e.g. a b ) ~ is used to convey indifference (e.g. a ~ b ) ECON201 Spring 2011 3-5 3.1 Preferences Properties of preferences: 1.Completeness When facing a choice between two bundles of goods (e.g. a and b ), a consumer can rank them so that either a b , b a , or a ~ b . 2.Transitivity Consumers’ rankings are logically consistent in the sense that if a b and b c , then a c . 3.More is Better All else the same, more of a commodity is better than less. In this regard, a “good” is different than a “bad.” ECON201 Spring 2011 3-6 3.1 Preference Maps Graphical interpretation of consumer preferences over two goods:
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03.03.2011 3 ECON201 Spring 2011 3-7 3.1 Indifference Curves The set of all bundles of goods that a consumer views as being equally desirable can be traced out as an indifference curve . Five important properties of indifference curves: 1.Bundles of goods on indifference curves further from the origin are preferred to those on indifference curves closer to the origin. 2.There is an indifference curve through every possible bundle. 3.Indifference curves cannot cross. 4.Indifference curves slope downward. 5.Indifference curves cannot be thick. ECON201 Spring 2011 3-8 3.1 Indifference Curves Impossible indifference curves: ECON201 Spring 2011 3-9 3.2 Utility Utility refers to a set of numerical values that reflect the relative rankings of various bundles of goods. The utility function is the relationship between utility measures and every possible bundle of goods. Given a specific utility function, you can graph a specific indifference curve and determine exactly how much utility is gained from specific consumption choices.
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