ec204 microeconomics

ec204 microeconomics term 1 content

assumptions of preferences

completeness, transitivity, monotonicity, continuity, convexity

assumptions of preferences: completeness

the idea that consumers can rank all possible bundles of goods; agents are never indecisive

assumptions of preferences: transitivity

the principle that if a consumer prefers bundle A over bundle B and bundle B over bundle C, then they must prefer bundle A over bundle C, ensuring consistent choices; no possibility of cycles

assumptions of preferences: monotonicity

the idea that more is better; consumers will always gain more utility from a greater quantity of a good in their bundle

assumptions of preferences: continuity

the idea that small changes in bundles will not change the ordering of preferences 

assumptions of preferences: convexity

averages, or a balanced combination of goods, are better than extremes of just one good

assumptions of rational preferences

completeness, continuity, and transitivity

assumptions of well-behaved preferences

monotonicity and convexity

types of preferences: cobb douglas

utility function where the consumer wants a balance between the two goods; more of either good increases utility, and a and b>0;

types of preferences: perfect complements

utility function for when goods are only useful when consumed together in fixed proportions

types of preferences: perfect substitutes

utility function for when the consumer views the goods as interchangeable; one unit of x1 can replace another fixed amount of x2

types of preferences: quasi linear

the consumer cares strongly about one good in a nonlinear way, while the other good enters utility linearly; 'v' represents a generic function, such as a log, square root, or power

types of preferences: homothetic

a utility function is homothetic if it is a monotonic transformation of a homogeneous function; the ratio of goods demanded stays constant as income changes

marginal rate of substitution [MRS]

the derivative/slope of a tangent point on an indifference curve = MRS; shows how goods need to be swapped or traded to remain indifferent