consumer choice theory principles of microeconomics 2023 boris nikolaev
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Consumer Choice Theory Principles of Microeconomics 2023 Boris Nikolaev. Utility Analysis. Utility = happiness (satisfaction from consumption) subjective. hard to measure. preferences are stable. mmm …. The Law of Diminishing Marginal Utility. - PowerPoint PPT PresentationTRANSCRIPT
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Consumer Choice TheoryPrinciples of Microeconomics 2023
Boris Nikolaev
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Utility Analysis
Utility = happiness (satisfaction from consumption)
1. subjective.
2. hard to measure.
3. preferences are stable.
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mmm…
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The Law of Diminishing Marginal Utility
# of units consumed Total Utility (TU) Marginal Utility (MU)
0 0
1 10
2 8
3 2
4 0
5 -2
Marginal Utility: utility from consuming one more unit of the good.
Total Utility: utility from consumption so far.
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The Demand Curve
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The ModelTwo goods: X, Y px = price of x px =price of y
How much X, Y should you consume?
U =f(X,Y) utility function
The budget constraint
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Assumptions
1. Perfect Information
2. “More is better”
3. Perfectly rational maximizing utility
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Master’s level explanation
• How we use calculus to solve this problem.
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The Budget Constraint
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PreferencesWe use indifference curves to measure preferences.
= all combinations of x, y that makes you equally happy.
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Properties of indifference curves
1. As you consume more (go NE) you become happier.
2. There are infinitely many indifference curves (they never intersect).
3. Downward sloping (convex shape)
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Marginal Rate of Substitution
MRS = - slope of ind. curve
Minimum amount of good y you would accept in a trade for one unit of good x
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The Tangency Condition
the tangency condition
The slope of the indifference curve = - MRS = - Px/Py
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Economic Efficiency
• Pareto Superior: change in allocation of resources is PS if we can make somebody better off without making somebody worse off.
• Pareto Optimal: an allocation is PO if no one could be made better off without making somebody else worse off.