Topics: Consumer theory, Preference, Microeconomics Pages: 7 (1285 words) Published: February 16, 2012
EC 3101: Microeconomic Analysis II A/P Indranil A/P Indranil Chakraborty

All relevant details on EC3101 are in the  syllabus The morning office hours on Tuesday will  start from the third week of lectures t tf th thi d k fl t

Important Highlights Important Highlights
• Text book: Intermediate Microeconomics: A modern  h approach by Hal R. Varian (8th edition) One midterm and one final exam Please do not email material, lecture or exam related  questions. Post your questions precisely on IVLE Forum or ask  during office hours. during office hours Read the syllabus very carefully. Please turn off the sounds of your mobiles, laptops and other  Please turn off the sounds of your mobiles laptops and other devices during lectures and tutorials.

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What is EC 3101 about? What is EC 3101 about?
• Microeconomic theory is about modeling Microeconomic theory is about modeling  individual consumer and firm behavior in a  way that allows quantitative analysis th t ll tit ti l i • EC 3101 will be a transition from graphical to  g p mathematical analysis, and cover new topics

Breaking the market Breaking the market
• The market consists of
– The demand side – Th The supply side l id – Government 

• Demand side consists of consumers Demand side consists of consumers – Consumer’s choice

• Supply side consists of
– Firm’s choice Firm s choice

Chapter Two
Budget Constraint on Choice Budget Constraint on Choice

See Sections 3.2 (and other relevant chapter 3) from Pindyck and Rubinfeld (6th edition) to recall material from EC2101 before you come to the lecture

Budget Constraints Budget Constraints
• Consumption bundle containing x1 slices of  p pizza, x2 cans of coke and so on up to xn units  p of commodity n: (x1, x2,  … , xn)

• Commodity prices: (p1, p2, … , pn)

Budget Constraints Budget Constraints
• Q: When is a bundle (x1, … , xn) affordable at  p prices (p1, … , pn)? (p p) • A: Affordable when p1x1 + + pnxn  m + … + p where m is the consumer’s (disposable)  income.

Budget Set and Constraint for Two  Commodities
x2 m /p2 Budget constraint is p1x1 + p2x2 = m the collection of all affordable bundles. bundles Budget Set S t m /p1 p x1

Higher income (m) gives more choice Higher income (m) gives more choice x2

Original g budget set x1

Lower income gives fewer choices? L i i f h i ?

New, Ne smaller budget set x1

Effect as p1 decreases from p1’ to  p p p1”?
x2 m/p2 -p1’/p2 p p Original budget set m/p1’ m/p1” x1

Chapter Three
 Preferences 

See sections 3.1, etc., from Pindyck and Rubinfeld (6th edition) to recall material  from EC2101 from EC2101

Tools to Describe Preferences Tools to Describe Preferences • An individual’s demand is constructed by
– Taking given prices – Figuring out what quantities the consumer will choose h h ll h

• Consumer choice depends on which bundles he  prefers over which other bundles f hi h h b dl • A visual description of his preference over bundles is  given by indifference curves • Let us see how the indifference curves come about

Preference Relations Preference Relations
• Comparing two different consumption  p g p bundles, x and y:  – strict preference: x is more preferred than y strict preference: x is more preferred than y. – weak preference: x is at least as preferred as y. – indifference: x is exactly as preferred as y.

• They are ordinal relations; i.e. they state only  y ; y y the order in which bundles are  preferred.

Preference Relations Preference Relations
denotes strict preference so  y p y x     y means that bundle x is preferred strictly  to bundle y. denotes indifference; x  y means x and y  • denotes indifference; x  y means x and y are equally preferred. • d denotes weak preference; t k f x     y means x is preferred at least as much as    y. •

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Preference Relations Preference Relations
• x     y and y     x imply x  y.   •...
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