Overview: Maximizing Behavior

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This group of readings applies and extends the analysis of rational consumer choice. It begins by abandoning the assumption that utility can be measured. Instead, a set of indifference curves represents a person's preferences, and that person strives to find the point on the highest indifference curve that his budget allows. The maximization and equimarginal principles are still there, but behind the scenes.

We then consider some implications of budget-line and indifference-curve analysis. The simple idea that more options are better than fewer options leads to the important concept of present value. We also discover the concept of consumers' surplus and see how this concept dissolves the paradox of value. Finally, we add the concept of producers' surplus, and see how fights over the division of surpluses can reduce the total.

After you complete this unit, you should be able to:

  • Interpret information on a graph showing a budget constraint and indifference curves.
  • Compute the present value of a future sum when given an interest rate.
  • Explain what in-kind transfers are and why economists argue that they are inferior to cash transfers.
  • Explain what happens to the price of bonds when the interest changes.
  • Define consumers' surplus and explain how it is measured on a demand curve.
  • Define producers' surplus and explain how it is measured on a supply curve.
  • Explain the paradox of value.
CopyrightRobert Schenk