ECON 310 (study)

notes and other things

3 basic assumptions about preferences

Completeness, Transitivity, Monotonicity

Completeness

Preferences have to be compared, you have to chose one of the 3 outcomes

Transitivity

Customers rankings are logically consistent:

Rational preferences, if they are complete and transitive

Monotonicity

All else equal, more of a commodity is better then less

In this sense, a “good” is different from a “bad”

Completeness violation(s)

indifferent= I dont care

Different= I dont know

Transitivity Violation

if: a>b, b>c, c>a

Then a>b>c>a

Sorites Paradox:

• Cup of coffee have lil sugar to a lot

• c₁~c₂, c₂~c₃

• c₁~c₂~c₃….~c₁₀₀₀

Cups next to each other are indifferent, but due to the law of transitivity, this means that the first cup and the one thousandth cup are indifferent, but in reality they are not they are very different.

Monotonicity Violation

Overeating in the pizza example

Consuming to much of a good that it becomes bad

Preferences

A consumers tastes or preferences determine the pleasure derived from goods/services

Indifference Curve

A graph showing different mixes of two goods that give a person the same total happiness or satisfaction.

Indifference Map

A complete set of indifference curves that summarize a consumers taste. Note: like preferences Indifference maps are specific to individuals.

Rules:

• Downward slope: To get more of one good, you must give up some of the other good.

• Curves do not cross: If they cross, it breaks the rules of logical choice.

• Higher means more: Curves placed further right and up mean a higher level of total joy.

• Bowed shape: Curves curve inward because people value extra items less when they already have many.

• CANNOT be thick