Lecture01IE

# Lecture01IE - ECON 520 (2011 Fall) Kansas State University...

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ECON 520 (2011 Fall) Kansas State University Zijun Luo Page 1 of 11 LECTURE 1: Utility, Preference and Indifference Curve Study tips for the lecture Remember and distinguish between cardinal and ordinal preferences. Some axioms/assumptions of preference are derived logically. Others are based upon empirical observations. Try to distinguishing them. Always remember to label everything on graphs. For this chapter, using a set of arrows to indicate preference directions is very important. Remember shapes and properties of several basic sets of indifference curves. 1. Assumptions of Preference 1.1 Completeness The Axiom of Completeness (referred as “ The Axiom of Comparison ” in page 70/66): A person can compare any two baskets of commodities A and B in such a way that it leads to one of the three following results: he or she (i) prefers A over B , or (ii) prefers B over A , or (iii) Both A and B are the same (they are indifferent). We have notations for these three cases: A is preferred to B : ; AB B is preferred to A : ; BA A and B are the same: . This axiom of completeness rules out the possibility that you cannot compare between two different baskets of commodities. In other words, it does not allow a person to say “I just can’t decide,” even though that happens sometimes. 1.2 Transitivity The Axiom of Transitivity (page 70/66): Consider any three baskets of commodities A , B , and C . If a consumer prefers A to B , and also prefers B to C , he or she must prefer A to C . Similarly, a person who is indifferent between A and B , and is also indifferent between B and C , must be indifferent between A and C .

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ECON 520 (2011 Fall) Kansas State University Zijun Luo Page 2 of 11 Violation of the axiom of transitivity, though happens sometimes, is considered as “irrational” in economics. See paragraph under the box of page 71/68 in textbook for an example about how someone can be exploited if he or she violates the axiom of transitivity. 1 Axiom of completeness and axiom of transitivity are two most basic assumptions towards people’s preferences. They are derived LOGICALLY because without either one of them, we cannot perform any economic analysis. The following assumptions, however, although not being formally stated in all microeconomic textbooks (or might stated differently), are still needed when one tries to determine a typical indifference curve from a “well-behaved” preference. They are based on EMPIRICAL OBSERVATIONS towards people’s choices and preferences. 1.3 The More, The Better The Axiom of Nonsatiation : Consider two baskets A and B , with different amount of the same commodities. Suppose A has more than B in every commodity and all these commodities are not economic “bads”, then a consumer prefers A over B .
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## This note was uploaded on 03/29/2012 for the course ECON 101 taught by Professor Schneider during the Spring '11 term at Kansas State University.

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Lecture01IE - ECON 520 (2011 Fall) Kansas State University...

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