1 / 21

Understanding Consumer Preferences and Indifference Curves in Economics

This text explores consumer preferences between different bundles of goods, focusing on the concepts of strict preference, indifference, and the assumptions underlying complete preferences. It examines how these preferences relate to indifference curves, which graphically represent consumer choice. The discussion includes key attributes such as monotonicity and convexity, and how the marginal rate of substitution (MRS) interprets a consumer's willingness to substitute one good for another. Understanding these concepts is essential for analyzing consumer choice behavior in economic theory.

gilead
Télécharger la présentation

Understanding Consumer Preferences and Indifference Curves in Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Preferences

  2. Preference Relation • The consumer strictly prefers bundle X to bundle Y: • The consumer is indifferent between X and Y:

  3. Weak Preference • If or • Then:

  4. How are the relations related? Q: What do these two relations imply?

  5. How are the relations related? A: The consumer is indifferent between X and Y:

  6. Assumption I: Complete Preferences For any two bundles X and Y: • X preferred to Y: • Y preferred to X: • Indifference:

  7. Assumption II: Reflexive Any bundle X is at least as good as itself:

  8. Assumption III: Transitive • If: • And: • Then:

  9. Indifference curves Indifference curve Weakly preferred set

  10. Q: Can indifference curves cross?

  11. Perfect substitutes

  12. Perfect complements

  13. Satiation

  14. Well-behaved preferences • Let’s impose some extra assumptions to rule out less interesting situations • Well-behaved preferences satisfy two properties: • Monotonicity • Convexity

  15. Monotonicity • Consider two bundles: where Y has at least as much of both goods and more of one. • Then: • Monotonicity implies that indifference curves have negative slopes

  16. Indifference curves have negative slopes

  17. Convexity • Consider two bundles: • Convexity implies that, for

  18. Convex preferences

  19. Non-convex preferences

  20. The MRS is the slope of the indifference curve at a point MRS=derivative of indifference curve Marginal rate of substitution

  21. Interpretation of MRS • The MRS measures the rate at which the consumer is willing to substitute one good for the other. • If good 2 is measured in dollars, the MRS measures the consumer’s willingness to pay for an extra unit of good 1.

More Related