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ECON 230D1 (30)
Chapter 3

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Economics (Arts)
ECON 230D1
Jim Engle- Warnick

CHAPTER 3 3.1 Preference - Economists assume that consumers have a set of tastes or preferences that they use to guide them in choosing between goods Properties of consumer preference - A consumer chooses between bundles of goods by ranking them as to the pleasure the consumer gets from consuming each - Consumer weakly prefers a to b (a b) - If the consumer weakly prefers a to b but the consumer does not weakly prefer b to a, then we say that the consumer strictly prefers a to b and would definitely choose a rather than b if given the choice (a b) - If the consumer weakly prefers a to b (a b) and weakly prefers b to a (b a), then we say that the consumer is indifferent or likes the two options equally (a ~ b) - We make 3 assumptions about the properties of consumers’ preference: o Completeness  When facing a choice between any two bundles of goods, a consumer can rank them so that one and only one of the following relationships is true (a b, b a or a ~ b)  This rules out the possibility that the consumer cannot decide which bundle is preferable o Transitivity  It eliminates the possibility of certain types of illogical behavior as it would be difficult to predict consumer rankings if they were not logically consistent  If the consumer weakly prefers a to b and weakly prefers b to c, then the consumer also weakly prefers a to c o More is better  States that, all else the same, more of a commodity is better than less of it. Indifference Curves - The set of all bundles of goods that a consumer views as being equally desirable - Summarizes consumer’s tastes - Each indifference curve consists of bundles of goods that provide the same utility or well-being for a consumer, but the level of well-being differs form one curve to another. - All indifference curve maps must have 5 important properties: o Bundles on indifference curves frther from the origin are preferred to those on indifference curves closer to the origin o There is an indifference curve through every possible bundle o Indifference curves cannot cross o Indifference curves slope downward o Indifference curves cannot be thick 3.2 Utility Utility Function - The relationship between utility measures and every possible bundle of goods Ordinal Preferences - If we only know consumers’ relative rankings of bundles but not how much more they prefer one bundle to another, our measure of pleasure is an ordinal measure - A cardinal measure is one by which absolute comparisons between ranks may be made (you know how much more one would prefer a certain product to another) Willingness to substitute - Marginal Utility o The extra utility that a consumer gets from consuming the last unit of a good o MU = = U1 = = U2 - Marginal rate of substitution o Slope at a point on the indifference curve because it is the maximum amount of one good that a consumer will sacrifice to obtain one mo
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