Topic 1-2: Preferences, Constraints and Choice Flashcards
consumer choice model
need to understand people
coming up with a modelof how peoplemake decisions
key idea of consumer choice
decision maker chooses so as to best achieve objectives given constraints
bundle
collection of goods
fundamental concept of choice theory
people have preferences over bundles but not goods
utility
completely abstract concept
utility function
takes a bundle as an input and returns a single number
ordinal not cardinal (only relative magnitudes matter)
assumptions about rational preferences
completeness
- successfully comparing bundles
reflexivity
- each bundle is at least as good at itself
transitivity
- if the consumer prefers x to y and y to z, then they prefer x to z
more assumptions about well-behaved preferences with indifference curves
monotonicity
- more of the good is better than less
convexity
- average consumption bundles preferred to extremes
violations of monotonicity
you don’t like something
you don’t care about something
you have enough of something
violations of convexity
rather consume two goods separately, not in combination
marginal rate of substitution
rate at which a consumer is willing to trade one good for another
issues with budget constraints
choices in life are constrained by a lot more than cash
the construct of utility functions
do not exist and are made up to help us model possibilities for human behaviour
rationality
very flexible model of consumer choice
for any choice, there are preferences that rationalise the choice
when is a choice ever irrational?
