ECN 203 1nd Edition Lecture 2 Outline of Last Lecture II. Opportunity Cost III. Assumptions a. Making a Model b. Strong Assumptionsc. Weak AssumptionsIV. Relaxing AssumptionsV. Ceteris Paribus Outline of Current Lecture VI. Definitions VII. Our Assumptions VIII.Diminishing Marginal Utilitya. MUb. TUIX. Marginal Utility with Multiple ChoicesX. The Initial Decision Rule Current Lecture2.0 Modeling Individual Choice - Definitions o Utility – satisfaction Assume we must maximize our utility o Consume – the act of deriving utility o Goods and Services – things that get us utility Goods can be stored - Assumptions o An individual consumes goods and services in order to maximize utility These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o We must assume: Everyone knows her own preference ordering Everyone is rational o A person is rational if there is an internally consistent logic that guides a choice process Given preference ordering, a rational person makes logical, internally consistent choices that maximize utility Her choices do not have to look rational to others - Diminishing Marginal Utility o Util – measure of a unit of utility o M&M Example You begin eating M&Ms. The first m&m gives you joy (utility), the second gives you less utility, and so on. At some point you receive zero utility and stop eating because the next m&m will not satisfy you. Economists refer to this type of decision making as choice at the margino Marginal utility (MU) The one under consideration The unique, individual effect of each successive unit consumed: how much did this satisfy me? Marginal choice involves making decisions about individual units in a succession of units, the smaller the units the more finely tuned your choices will be. Marginal analysis Total utility (TU)- The sum of all these marginal effects: on the whole, how much satisfaction did I get from eating?- As long as the margin is positive, it adds to the total - If the margin is negative, the marginal utility becomes negative.- Marginal Utility with Multiple Choices o Marginal Utility line – represents how much utility a person derives from each successiveunit of consumptiono MU graphs vary from person to person due to different attitudes towards activities- The Initial Decision Rule o Decision rule – represents how we make choices General decision rule: Consume until MU = 0 This decision rule is not realistic. We start with this general rule because it provides s first approximation of realitybased on a strong assumption From this point, we will begin relaxing our assumptions and build complexities of:- Scarcity, production, the future, risk, and
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