Intermediate Microeconomics - PowerPoint PPT Presentation


PPT – Intermediate Microeconomics PowerPoint presentation | free to download - id: 7a056a-ZjlkN


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation

Intermediate Microeconomics


Intermediate Microeconomics Preferences Consumer Behavior Budget Set organizes information about possible choices available to a given consumer. – PowerPoint PPT presentation

Number of Views:24
Avg rating:3.0/5.0
Slides: 15
Provided by: Informat2272
Learn more at:


Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Intermediate Microeconomics

Intermediate Microeconomics
  • Preferences

Consumer Behavior
  • Budget Set organizes information about possible
    choices available to a given consumer.
  • Next step is to determine how a consumer will
    choose among the bundles available in his or her
    budget set.
  • To do so, we make the seemingly obvious
    assumption that individuals are rational
  • Each individual chooses the bundle he or she most
    prefers among all bundles available in his or her
    budget set.
  • Therefore, we need to develop a theory of
    preferences, that is both flexible and yet
    restrictive enough to be useful for understanding
    how choices will change as the economic
    environment changes.

Theory of Preferences
  • Consider again a bundle of goods denoted A-q1A,
    q2A, , qnA
  • For any given individual and any given bundle A,
    we want to be able to describe the following
  • Strictly preferred set all bundles the
    individual strictly prefers to A.
  • Weakly preferred set all bundles the individual
    weakly prefers to A (i.e. likes at least as much
    as A)
  • Any bundle not in weakly preferred set, the
    individual must like strictly less than A.

  • 3 axioms in our theory of consumer preferences
  • Completeness An individual can weakly rank any
    two possible bundles.
  • Reflexivity A bundle is at least as good as
  • Transitivity If a bundle C is strictly
    preferred to a bundle A, and an individual is
    indifferent between a bundle A and another bundle
    D, then the individual must also strictly prefer
    bundle C to bundle D.

  • Final common assumption - preferences exhibit
    non-satiation or monotonicity.
  • Weaker version more cant be worse.
  • Essentially assumes free-disposal
  • Stronger version more is always better
  • Certainly not true at levels (100 donuts does me
    no better than 99)
  • For practical purposes though, not bad, as we
    want to model situations where individuals have
    to make choices between things they value.

  • Key issue we want to understand and analyze in
    economics is trade-offs.
  • e.g. how much of one good is an individual
    willing to trade-off to consume more of another
  • Our preference axioms allow us to consider such
    trade-offs via indifference curves.
  • For any given bundle A, there is an indifference
    curve that connects A to each bundle B where a
    given consumer is indifferent between A and B.

Indifference Curves
  • Characteristics of Indifference Curves
  • Consider one of your indifference curves between
    number of chips and ounces of Coke.
  • Is every possible bundle on an indifference
    curve? Why or why not?
  • How many indifference curves are there?
  • Will slope of indifference curves be positive or
    negative? How do we know?
  • Can indifference curves cross? Why or why not?
  • If A is on a higher indifference curve than B,
    what does this mean? How do we know this?

Interpreting Indifference Curves
q2 q2
  • Indifference curve indicates that at bundle
    q1,q2, an individual will be willing to give
    up ?q2 units of good 2 to increase consumption of
    good 1 by ?q1.
  • What happens as ?q1 goes to zero?

Interpreting Indifference Curves
  • Marginal Rate of Substitution (MRS) the slope
    of indifference curve at a given point.
  • MRS indicates an individuals willingness-to-pay
    for a marginal increase of one good in terms of
    the other, at a given bundle.
  • So how do you interpret an indifference curve
    when it is very steep at a given bundle (i.e.
    slope large in magnitude)?
  • How about when it is relatively flat?

Well-behaved preferences
  • In addition to our three Axioms and monotonicity,
    we will also often assume preferences are convex.
  • Convex preferences - If bundles
  • B-q1B, q2B and C-q1C , q2C
  • are in weakly preferred set to A, then so will
  • (q1B q1C)/2 , (q2B q2C)/2 .
  • Intuition averages are at least as good as
    extremes, or that individuals prefer to have a
    combination of goods at moderate levels to lots
    of one and little of the other (consider chips
    and coke)
  • Monotonic and Convex preferences are called
    well-behaved preferences.

Interpreting Indifference Curves
  • Consider an indifference curve of following form.
  • Does it represent convex preferences?
  • What does this shape reveal about MRS as q1
    increases and q2 decreases?
  • What is intuition?

Interpreting Indifference Curves
  • Diminishing MRS
  • Implies an individuals willingness to trade one
    good for another diminishes the less he has of
    that good.
  • Slope of Indifference Curve decreases as q1
    increases and q2 falls.
  • Examples
  • Chips and Coke?
  • Coke and a composite good?
  • Coke and Apple Juice?
  • What is intuition behind different shapes of
    indifference curves?

Interpreting Indifference Curves
  • Perfect substitutes - constant MRS
  • Examples?
  • What will indifference curves look like?
  • Perfect Complements must consume in fixed
    proportions, or individual not willing to trade
    off some of one for more of another, therefore
    MRS is undefined.
  • Examples?
  • What will indifference curves look like?
  • Are such preferences well-behaved?
  • Examples of when preferences might not be

Modeling Preferences over Other Types of Goods
  • Suppose again you work for Doctors Without
  • What will your indifference curves look like
    between people cured of Tuberculosis vs.
    people cured of AIDS?