A full sem class notes of mirco economics class Econ 152 at the University of Auckland, including notes, diagrams, formulas and examples. I achevied an A in this class due to my notes and working outs.
- Rational Customer Choice
Rational customer choice theory is the assumption that customers enter the market with a well-
de ned preference, taking prices as given and allocating their income to best serve their
preferences.
- Bundles of goods model
Bundle = combination of goods or services
to maximise customers values. Customer
has max income of 100$ PW (M).
If shelter costs $5 per Sq Yd (max shelter =
20 Sq Yd, denoted as 20,0) . $10 per Lb
food (max food = 10 Lb, denoted as 0,10).
There can be any combinations within these
limits.
- Budget line (Budget Constraints)
Formula = I = PxX + PyY
L and K are the extreme ends, the customer
can purchase anything along the line
(Budget Constraint).
The BC (B) is rise over run (Vertical
intercept / Horizontal position), - (10 Lb per
wk) / (20 Yd wk) = -1/2 Lb/Sq yd.
The negative sign is because the slope is
downward. - (M / Pf) / (M / Ps).
(D) is within the triangle and is classed as a a ordable set, (E) is out of the triangle and is classed
as a una ordable set.
S and F is denoted for the quantities of shelter and food that will be within the range of the budget
(Ps S + Pf F = M). To solve F in terms of S we use (F = M/Pf - Ps/Pf S) with (M/Pf )being the
constraint and (- Ps / Pf) being the slope, it is (F = 10 - 1/2 S).
- Budget shifts due to price changes
Change income or price of goods will shift
the slope and rise of the budget constraint.
If there is an increase in Shelter price from
$5 to $10 then the vertical intercept of
consumption will fall while the income and
food remain unchanged, (Shown in Fig 3.3).
- Concept check 3.1
fi ff ff
, - Concept check 3.3
- Budget shift due to income changes
The e ect of change in income is e ects all
change in products equally. If income is cut
from $100 PW to $50 PW then Ps falls to 10
and pf falls to 5.
The new budget is parallel to the old each
with a slope of - 1/2, the budget constraints
remains the same if the income falls by half or prices increase by half.
- Concept check 3.4
- Budgeting with more than two goods
If we have more than 2 good we call it
composite good and assume each good
costs $1. If someone consumes all of other
goods (Y) it will equal their income (M), if
they spend it all on the X good it will equal
(M/Px).
- Consumer Preferences (properties of preferences) Ordering
1) Completeness = Consumer to rank all possible combinations of goods and services.
Assumptions that is never satis ed as there are many goods we know nothing about, analysis
the choices consumers know about.
2) More is better = All other things equal, more is preferred than less. As long as consumers can
dispose or storage goods they don’t want things can’t make them worse o .
3) Transitivity = or any three bundles A, B, and C, if he prefers A to B and prefers B to C, then he
always prefers A to C or if A is = to B and B is = C then A is = C.
4) Convexity = Mixture of goods are preferable than extremes, suppose A has (2,0) and B has
(0,2) and the consumer is indi erent of these too bundles, they would prefer bundle C (1,1)
which has a mixture of A and B.
ff ff fi ff ff
, - Indi erence curves
Using the more is better assumption tells us
that anything more than A is preferred to A
and anything less than A is not preferred to A.
Z-W will be the extreme ends of the rank. B is = to A in the eye of the consumer. C is also = to B
in the eyes of the consumer, Since B is = to A, C is also = to A (Fig 3.8).
This is indi erence curves (I) which are
bundles of equally attractive combinations of
di erent amounts (Fig 3.9).
If there is an (I2) that is higher than a pervious
(I1) than anything on (I2) is preferred over
anything on (I1).
The completeness property shows that there
is a (I) passing through every bundle, which is
represented by an indi erence map (Fig 3.10).
Any curve higher is preferred than anything
lower depending on consumers preference.
- Four properties of indi erence curves
1) (I) are ubiquitous, any bundle on the same
curve are the same
2) (I) are downward sloping, if they were
upward sloping it would contradict the
more is better assumption.
3) (I) from the same map can not cross, it is
simply not possible for bundle D on (I1) to
be equally attractive as bundle F on (I2),
(Fig 3.11).
4) (I) become less steep as we move
downward, this is implied by the convexity
property.
- Marginal rate of substitution (MRS)
MRS shows that when a consumer has more
of good A it will take less of good B for her to
trade good A for some of good B. At point A in
the IC it takes 3 units of food to give up 1 unit
of shelter, her MRS at A is 3. At D she will only
trade 1/4 units of food for 1 unit of shelter. Her
MRS at D is 1/4. MRS = Ps / Pf .
REMEMBER MRS = SLOPE OF BC.
ff ff ff ff ff
, - Class notes Week 1
Marginal Rate of Substitution (MRS) = rate at which consumers are willing to exchange the good
measured along the vertical axis for the good measured along the horizontal axis (MRS = Change
in Fa / Change in Sa)
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