market baskets (bundles) - group of goods
- how/why consumers decide how much of each good to buy
-
assumptions about preferences - consumers often behave erratically, but assumptions must be made for models
- completeness - all goods are ranked (either above/below, or tied for a rank)
- transitivity - if A preferred to B and B preferred to C, then A preferred to C
- more > less - consumers always want more for less
indifference curve - all combinations of market baskets providing same satisfaction
- matches up market baskets where there’s more of 1 good and less of another from the preferred basket
- market baskets above/right of curve is preferred to any basket on curve
- must slope downward (or else violates assumption that more > less)
- consumer is indifferent between baskets A, B, or C, since they lie on the same indifference curve
- A, B, C preferred to basket E, not as preferred as basket D
- baskets on an indifference curve have more of 1 good but less of another when compared to other baskets on the curve
-
indifference map - describes preference for all combinations
- set of indifference curves, can’t intersect
-
marginal rate of substitution - max amount of 1 good that consumer is willing to give up for 1 extra unit of another good
- calculated w/ respect to vertical axis
- convex indifference curves >> decreasing marginal rate of substitution
- perfect substitute >> linear line graph >> constant marginal rate of substitution
- if 1 good is the same as another, it doesn't matter how many of each you have
- only the total number matters
- U = A + B
- perfect complement >> need both to gain satisfaction >> right angle graph
- ex. buying left/right shoes
- it doesn't matter how many right shoes you have if you don't have a left shoe to match
- consumer indifferent between a basket containing 1 right and 1 left shoe and another basket containing 1 right and 15 left shoes
- U = min(A,B)
utility function - assigns numerical values to market baskets
Subject:
Subject X2:
