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Lecture

ECON 201 Consumer theory 9 oct.docx

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Department
Economics
Course
ECON 201
Professor
Ronald Schlenker
Semester
Fall

Description
ECON 201 – 9 October CONSUMER THEORY 1. Objective – to determine how a consumer will behave, given income & the prices of commodities 2. Utility analysis a. Utility - amount of satisfaction a consumer obtains from consumption b. Assumption – utility is numerically measurable =>’utils’ c. Problem – assumption is unrealistic 3. Indifference Curve (IC) analysis a. Assumption i. Utility is ordinarily measurable ii. Indifference between bundles may exist iii. More is preferred to less b. IC definition – a curve showing combinations of 2 goods that give the consumer the same level of satisfaction Example: Pieces of pizza Bottles of beer 8 1 5 2 3 3 2 4 (cf graphe) c. Marginal rate of substitution (MRS) – the rate at which a consumer is willing to trade one good for another whil staying at the same level of satisfaction  MRS is the slope of an IC d. Properties i. Downward sloping ii. Convex to origin (bowed inward)  MRS decreases going left to origin  Issue of relative scarcity iii. ICs further from origin preferred to those closer to origin (cf graphe) e. ICmax – set of ICs i. ICs are individualized ii. ICs cannot be summed iii. If tasks change, ICs change 4. Buget Line (BL) a. Example Tom’s prices Pbeer = 2.5$ /bottle Ppizza= 1$ / piece My wallet has 10$ (cf graphe) b. General case – goods X and Y, prices Px and Py & budget B i. X intercept = B/Px ii. Y intercept = B/Py iii. All points on or below BL are affordable iv. All points above or to right of BL are unaffordable v. Assume all of budget is spent vi. Slope of BL = dQy/qQx=…= -Px/Py (relative price ratio) 5. Consumer Equilibrium – maximize Satisfaction subject to the budget constraint (f graphe) Optimal- occurs at tangency between the BL & an IC Slope of BL = slope of IC => -Px/Py = MRS 6. Changes in Income a. Example – I find $10 on the street (translation de la droite correspondant a l’augmentation du budget de 10$) b. BL shifts in parallel shift i. Income increase => BL shifts right ii. Income decrease => BL shifts left c. General case => start with B, Px, Py , then budget doubles, then triple..( cf graphe) d. Income consumption Curve (ICC) – connects equilibrium when income cha
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