Microeconomic Analysis Under the Pure Competition Assumption

Topics: Consumer theory, Indifference curve, Preference Pages: 4 (1058 words) Published: March 20, 2013
2nd part: Microeconomic Analysis Under the Pure Competition Assumption Chap 3-The Theory of Consumer Choice (stiglitz chap 5)
Section 1) Preferences: What the Consumer Wants
A/ The consumer preferences
* Utility= the level of happiness or satisfaction that a person receives from the consumption of goods and services. Utility is a measure of well-being * Focus on 2 goods X and Y
* Cardinal/Ordinal measurements related economics problem. cardinal: a variable is cardinally measurable if a given interval between measures has a consistent meaning. Ordinal: a variable is ordinally measurable if ranking is possible for values of the variable

The way in which the pb of preferences not being cardinally measuredsolved by John Hicks.

B/Total and Marginal Utility
* Utility= function
How much utility the consumer will receive from each bundle? Both variables are preceded the + sign. The more X and Y are consumed, the more the Utility grows. The extent to which the utility will increase is 3 times bigger than the consumption of Y. The utility of Y is 3x higher than X.

The nature of preferences:
(1) Completeness
(2) Transitivity
(3) Nonsatation

1) A,BA>B or A<B or Almost=B
2) A>B and B>CA>C
3) The consumer always prefers more to less a commodity
Satisfaction increase with the consumption of goods.
Diminishing Marginal Utility
* Ex: drinking water
* The law of diminishing marginal utility: (= all other things being equal, the additional satisfaction derived from consuming additionnal unit of the commodity will diminish with each successive unit consuming. total utility will continue to rise as each successive unit is consumed by other decreasing pace.). The marginal utility is the slope of the total utility function get flatter and flatter. * Um is the slope of the U function

C/ Representing Preferences with Indifference Curves
Graphical Representation
An indifference curve= shows...
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