ECON 201 Lecture Notes - Lecture 6: Ordinal Utility, Psy, Rationality
14 May 2018
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6.1 Rationality
• Critical behavioural assumption in economics is that agents
operate in a way that is oriented towards achieving a goal.
• Individuals and firms maximize their personal well-being
and/or their profits.
• To achieve their goals then they must act in a rational manner
• individuals act in a manner that is consistent with obtaining a
given objective.
• The modern theory of behavioural economics and
behavioural psy- chology examines decision making in a
wide range of circumstances and has uncovered many
fascinating behaviours
• In this chapter, our aim is to understand more fully the
behavioural forces that drive the demand side of the
economy.
• Economists analyze individual decision making using two
different, yet complementary, approaches: utility analysis and
indifference analysis.
• Begin by portraying individuals as maximizing their
measurable utility
• Then progress to indifference analysis, where a weaker
assumption is made on the ability of individuals to measure
their satisfaction.
• In this second instance we do not assume that individuals can
measure their utility numerically, only that they can say if
one collection of goods and services yields them greater
satisfaction than another group→ This ranking of choices
corresponds to what is sometimes called ordinal utility –
because individuals can order groups of goods and services
in ascending order of satisfaction.
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6.2 Choice with measurable utility
• Cardinal utility is a measurable concept of satisfaction.
• Total utility is a measure of the total satisfaction derived
from consuming a given amount of goods and services.
• Neal loves to pump his way through the high-altitude
powder at the Whistler ski and snowboard resort.
• His student-rate lift-ticket cost is $30 per visit. He also
loves jazz bars in downtown, and each such visit costs him
$20.
• Must allocate his monthly entertainment budget carefully.
• These utils are measurable, and use the term cardinal
utility
• Neal’s total utility from each activity in this example is
independent of the amount of the other activity he engages
in.
• These total utilities→ more of each activity yields more
utility, so the additional or marginal utility (MU) of each
activity is positive
• This positive marginal utility for any amount of the good
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find more resources at oneclass.com
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