ECON 1011 Lecture 4: The Pure Exchange Model
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ECON 1011 Full Course Notes
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Two people (smith and jones) & two homogeneous goods (apples, oranges) Smith and jones receive utility (happiness) from the goods. They know their preferences for the goods, how much utility they get. Smith and jones have preferences that include more is better; diminishing marginal utility in consumption of both goods. Smith has 10 oranges, jones endowed with 10 apples. They seek higher utility, seek to maximize utility. Willing to engage in mutually voluntary trade. Have perfect information know the quality of other"s goods. Smith and jones can meet with each other in the same location. Indifference curve are lines drawn through every point that gives the person the same utils. Move upward and to the right increases the value. How many apples to take away, to get to the original util: if you change the assumption from diminishing marginal utility to constant marginal utility, the curves become straight lines.
