Ch 2 consumer theory basics

With the hope that you wont be turned off from

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Unformatted text preview: As such these pundits are oblivious to the epistemological power of economics and their utterings are mutterings. With the hope that you won’t be turned off from economics because of (necessarily) over-simplified assumptions in ECO 204, let’s build the first model of this course: modeling consumer choice or “consumer theory”. Consumer theory is the foundation of marketing (“advertising and segmentation”); finance (“portfolio allocation” and “inter-temporal savings”); public economics (“taxes, subsidies, etc.”); risk analysis (“decision making under uncertainty”); public health (“explaining why teenagers are having more oral sex”); etc. 2. The Universe of Choices and the Consumption Set In reality, economic agents make decisions over a very large set of choices which we’ll call the “universe of choices”. This includes everything from “steaks for dinner” (what time? where? how many?); “sushi for lunch” (what time? where? how many?); “martinis” (what time? where? how many?); “marriage” (um .. well if you must then with whom? when? where?); “go to law school?” (where? when?); etc.: { } Given the sheer size of universe of choices and in the interests of developing a tractable model, we narrow the focus of the model to a sub-set of the universe of choices: consumers’ choice of consumption amounts of “commodities” or goods and services (“goods”) available for sale to consumers5: { } We note that prices can be uniform (the “same” price for each unit; for example, on October 2nd, 2012, the price of Black Strobe’s Chemical Sweet Girl was $13.83 per CD regardless of how many CDs are purchased) or that prices can be nonuniform (the price is NOT the same for each unit; for example, according to this October 9th 2008 article in PC World Amazon’s AWS cloud computing service was offering volume, or tiered, pricing to high-volume customers). Whatever the form of prices, we assume that consumers are price takers. That is, a customer will -- in fact she must -- pay the asking price; the seller...
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This note was uploaded on 03/20/2014 for the course ECON 204 taught by Professor Ajazhussain during the Fall '09 term at University of Toronto.

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