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Eco200 6-8
Eco200 6-8
Eco200 6-8
September 2, 2021
Elasticity Consumer Theory
Elasticity of Demand
Elasticity
One side effect of illegal drug use is crime → Users often turn
to crime to finance their habit
Let’s examine two policies designed to reduce illegal drug use
and see what effects they have on drug-related crime.
Interdiction
Education spending
Elasticity Consumer Theory
Interdiction
Elasticity Consumer Theory
education
Elasticity Consumer Theory
Consumer Behavior
Consumer Behavior
Consumer Behavior
Consumer Behavior
Consumer Behavior
Consumer Preferences
Consumer Preferences
Consumer Preferences
Assumptions on Preferences
Completeness!
Transitivity!
More is Better than Less
Elasticity Consumer Theory
Assumptions on Preferences
Elasticity Consumer Theory
Indifference Curves
Indifference Curves
Indifference Curves
Elasticity Consumer Theory
Indifference Maps
Indifference Maps
Indifference Maps
Elasticity Consumer Theory
Indifference Maps
Elasticity Consumer Theory
Utility Function
Utility Function
Utility Function
Utility Function
Utility Function
Utility Function
u =x +y
Elasticity Consumer Theory
Utility Function
u =x +y
u = x 0.5 y 0.5
Calculate utility for bundle A (x=4 and y=9); and bundle B
(x=12 and y=3). (POLL)
Elasticity Consumer Theory
Utility Function
Utility Function
Utility Function
Marginal Utility
Marginal Utility
Marginal Utility
∆U1 = MUy ∆Y
Elasticity Consumer Theory
∆U1 = MUy ∆Y
∆U2 = MUx ∆X
Elasticity Consumer Theory
∆U1 = MUy ∆Y
∆U2 = MUx ∆X
∆U = ∆U1 + ∆U2
Elasticity Consumer Theory
∆U1 = MUy ∆Y
∆U2 = MUx ∆X
∆U = ∆U1 + ∆U2
Elasticity Consumer Theory
⇒ MUy ∆Y + MUx ∆X = 0
Elasticity Consumer Theory
⇒ MUy ∆Y + MUx ∆X = 0
∆Y MUx
⇒ =−
∆X MUy
MUx
⇒ MRSxy = −
MUy