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York University
ECON 2300

Intermediate Microeconomic Theory I ECON 2300 – Summer 2011 – Mark Melatos Topic 2 – Consumer Choice – May 19 Assumptions - Individual tastes (preferences) determine the pleasure (‘utility’) people derive from the goods and services they consume. - Consumers’ choice are constrained (e.g. by income). - Consumers maximise utility subject to their constraints. Consumer Preferences - Properties of consumer preferences: o Completeness o Transitivity o Non-satiation (‘more is better’) - Some fundamental concepts o Market basket o Indifference curve IC Slopes - Marginal rate of substitution (MRS) o Slope of the IC at a given market basket. o The amount of one good a consumer is willing to give up obtaining more of another good. Utility - Consumers can rank market baskets according to which give them the most pleasure. - Can assign a numerical value to each basket that reflects the pleasure derived. o I.e. higher utility  more pleasure. - Assumption: ‘utility is an ordinal, not a cardinal measure’. Marginal Utility and the MRS - Marginal utility (MU): measures the extra satisfaction obtained from consuming an extra unit of a good, holding the amount of the other good fixed. The Budget Constraint (BC) - So far, looked at consumer tastes/preferences. - Now, look at what consumers can afford. - BC  all combinations of goods (i.e. market baskets) for which total expenditure = total income. The Consumer’s Problem
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