Economics 250A Lecture 1: a Very Quick Overview of Consumer Choice
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CONSUMER CHOICE 1.1. Unit of Analysis and Preferences. The
CONSUMER CHOICE 1. THE CONSUMER CHOICE PROBLEM 1.1. Unit of analysis and preferences. The fundamental unit of analysis in economics is the economic agent. Typically this agent is an individual consumer or a firm. The agent might also be the manager of a public utility, the stockholders of a corporation, a government policymaker and so on. The underlying assumption in economic analysis is that all economic agents possess a preference ordering which allows them to rank alternative states of the world. The behavioral assumption in economics is that all agents make choices consistent with these underlying preferences. 1.2. Definition of a competitive agent. A buyer or seller (agent) is said to be competitive if the agent assumes or believes that the market price of a product is given and that the agent’s actions do not influence the market price or opportunities for exchange. 1.3. Commodities. Commodities are the objects of choice available to an individual in the economic sys- tem. Assume that these are the various products and services available for purchase in the market. Assume that the number of products is finite and equal to L (` =1, ..., L). A product vector is a list of the amounts of the various products: x1 x2 x = . . xL The product bundle x can be viewed as a point in RL. 1.4. Consumption sets. The consumption set is a subset of the product space RL, denoted by XL ⊂ RL, whose elements are the consumption bundles that the individual can conceivably consume given the phys- L ical constraints imposed by the environment. -
Primal and Dual Approaches to the Analysis of Risk Aversion
378.752 D34 W-01-8 Primal and Dual Approaches To the Analysis of Risk Aversion bi Robert G. Chambers and John Quiggin WP 01-08 Waite Lilorary Dept. Of Appllied Economics Unilwrsfty of Minnesota 1994 Buford Ave - St. 232 CilaOff Paull MN 55108-6040 Department of Agricultural and Resource Economics The University of Maryland, College Park e Primal and dual approaches to the analysis of risk aversion Robert G. Chambers' and John Quiggin2 Preliminary draft for discussion purposes only, please do not cite or quote. July 9, 2001 'Professor of Agricultural and Resource Economics, University of Maryland and Adjunct Pro- fessor of Agricultural and Resource Economics, University of Western Australia 2Australian Research Council Fellow, Australian National University In a classic paper, Peleg and Yaari (1975) observe that the marginal rate of substitu- tion for risk neutral decisionmakers between state-contingent income claims is given by the relative probabilities. Thus, probabilities play the same role as prices in the traditional producer and consumer choice problems. More generally, for risk-averse individuals, the marginal rates of substitution between state-contingent incomes may be interpreted as rel- ative 'risk-neutral' probabilities, a point developed further by Nau (2001). This analogy is particularly important in the case where there are spanning portfolios. In that case, after normalization, the induced Arrow-Debreu contingent claims prices can be interpreted as the equilibrium risk-neutral probabilities for all individuals participating in the market. These observations suggest that preferences under uncertainty can be informatively ex- amined in much the same fashion that one analyzes consumer preferences under certainty, that is, in terms of convex indifference sets and their supporting hyperplanes. -
Notes on Microeconomic Theory
Notes on Microeconomic Theory Nolan H. Miller August 18, 2006 Contents 1 The Economic Approach 1 2ConsumerTheoryBasics 5 2.1CommoditiesandBudgetSets............................... 5 2.2DemandFunctions..................................... 8 2.3ThreeRestrictionsonConsumerChoices......................... 9 2.4AFirstAnalysisofConsumerChoices.......................... 10 2.4.1 ComparativeStatics................................ 11 2.5Requirement1Revisited:Walras’Law.......................... 11 2.5.1 What’stheFunnyEqualsSignAllAbout?.................... 12 2.5.2 Back to Walras’ Law: Choice Response to a Change in Wealth . 13 2.5.3 TestableImplications............................... 14 2.5.4 Summary:HowDidWeGetWhereWeAre?.................. 15 2.5.5 Walras’Law:ChoiceResponsetoaChangeinPrice.............. 15 2.5.6 ComparativeStaticsinTermsofElasticities................... 16 2.5.7 WhyBother?.................................... 17 2.5.8 Walras’ Law and Changes in Wealth: Elasticity Form . 18 2.6 Requirement 2 Revisited: Demand is Homogeneous of Degree Zero. 18 2.6.1 Comparative Statics of Homogeneity of Degree Zero . 19 2.6.2 AMathematicalAside................................ 21 2.7Requirement3Revisited:TheWeakAxiomofRevealedPreference.......... 22 2.7.1 CompensatedChangesandtheSlutskyEquation................ 23 2.7.2 Other Properties of the Substitution Matrix . 27 i Nolan Miller Notes on Microeconomic Theory ver: Aug. 2006 3 The Traditional Approach to Consumer Theory 29 3.1BasicsofPreferenceRelations............................... 30 3.2FromPreferencestoUtility...............................