Preferences Flashcards
What are preferences?
The goods that we want
What is a consumption bundle?
The complete list of goods and services in a choice problem
How is a consumption denoted (give example)
q=q1,q2 (q=1,1) where 1 denotes 1 pack of chips and 1 beer
What does } denote?
Strict Preference i.e. you definitely want one good over another
What does } denote?
~
Weak Preference i.e. you consider one good at least as good as the other
What does ~ denote?
Indifference i.e. you don’t care which good you receive
What is completeness?
Completeness presents the view that you have an opinion on your consumption choices
What is transitivity?
Your opinions stay consistent e.g. if q>p and p>r then q>r
What is an indifference curve?
It collects all of the consumption bundles for which you are indifferent
What does an indifference curve look like?
Bundles further from the origin make you happier
What is the slope of the indifference curve known as?
Marginal Rate of Substitution (MRS)
What does the Marginal Rate of Substitution indicate?
The rate at which a consumer is willing to substitute one commodity for another and be as happy as before i.e. how much beer are you willing to give up for more chips and still be as happy
What are the characteristics of a well behaved preference?
Monotonic: More of one good is always preferred to less
Convex: Averages are preferred over extremes
What is a fundamental property of indifference curves?
They cannot intersect due to transitivity
What is a good?
When more of one commodity is always preferred less e.g. beer
