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Consumption Country pct Australia Banglad. Brazil Canada Egypt Germany Japan Thailand U.K. U.S. 61.9 67.3 61.9 56.7 74.2 57.8 62.4 56.1 65.8 67.8 GDP 21240 1590 7300 20000 1270 24920 33780 2110 22790 34100 amount 13147 1070 4519 11340 942 14403 21078 1183 14995 23119 Country GDP per Capita Health Expenditur e per Capita Life Expec t. Average Years in Poor Health Prevalence of HIV Albania 3600 144 72 9.4 0.01 Bangladesh 1590 57 61 8.2 0.02 Brazil 7300 482 67 8.4 0.57 China 3920 176 70 7.4 0.07 660 27 42 8.6 10.63 24920 2642 77 6.5 0.10 800 22 47 11.5 5.06 8010 368 66 6.6 0.18 34100 4433 77 6.9 0.61 Ethiopia Germany Nigeria Russian Fed. United States Source: World Bank website, http://www.worldbank.org/data/databytopic/class.htm, on April 29, 2002. Notes: GDP (for 2000) is via the purchasing power parity method; health care expenditures per capita were found by applying the 1990-98 average percentage of GDP spent on health care; life expectancy is estimated from birth; years spent in poor health and HIV are World Bank health risk indicators; HIV figures represent the percent of adults estimated to carry the virus. Indifference Curve Analysis 1. Develop indifference curves 2. Develop budget constraint 3. Some basic analysis: a. changes in prices; b. changes in income; c. the Engels Curve 4. The Food Stamps Problem Indifference curve: A collection of points for which the consumer is indifference between each of them and some reference point. Typically shown in the context of a two good world on a two-dimensional graph. . OG Indifference curve .B D A . C .E .F Food What sense does the indifference curve make? A heuristic approach. OG Food The c onsumer’s preference map is the set of all his indifference c urves. Here several m ore are shown Determinants of Consumer Preferences Experience Demonstration effects Advertising Conspicuous consumption The axiomatic approach to indifference curves is a search for a minimum set of assumptions regarding consumer behavior through which to generate indifference curves. Standard axioms: 1. More is preferred to less—nonsatiation 2. Completeness—all points in a relation 3. Transitivity– A B; B C; A C Og A .C B U1 U2 . . Food Why indifference curves cannot cross (and still obey the axioms for preferences). The marginal rate of substitution and the shapes and kinds of indifference curves. Perfect substitutes Perfect complements Steepness, what does it mean Do they shift or stay in place? OG U1 B A U1 Food The axioms imply that indifference curves must be unbroken, ie continuous. These two sets of indifference curves represent people who differ in their relative willingness to trade food for medicine. Which one is hungry? Careful. The budget equation: B = pogOG + pfF OG = B/pog – pf/pogF Meaning: The budget equation will depict a curve in OG-Food space that is downward sloping (note: its derivative –pf/pog is negative). OG Budget constraint B/p f Food If budget is B, then the most OG possible to buy is B/p o, and similarly the most Food possible is B/p f . The budget constraint connects these two intercepts. OG A B C Food As the price of Food falls, the budget constraint shifts from A to B and then to C. OG Food C B A As income increases, the budget constraint shifts outward parallely OG . E UE Budget line Food Consumer equilibrium in indifference curve analysis Utility, a quantitative measure of satisfaction. a. utility is constant along an indifference curve. OG Indifference curve .B . D A . C .E .F Food What sense does the indifference curve make? A heuristic approach. b. higher indifference curves yield higher utility. c. utility is treated as ordinal in most cases “ordinal” measures are like 1st, 2nd, 3rd, etc “cardinal” numbers are like 1.0, 3.6, 7.1 etc (utility numbers are really “cardinal but arbitrary”) Jeremy Bentham and Utilitarianism 1748-1832. For Bentham, utility was: 1. Metric (also called Cardinal, remember--today we think its ordinal). 2. Interpersonally comparable. Bentham was extremely optimistic in these beliefs. If utility were metric, then society could correctly identify and measure exactly how happy or well-off America was, or Detroit, or this classroom. It would be scientific. Nevertheless his utilitarianism proved useful in bringing reforms: 1. Prisons were made more humane. 2. Insane asylums were made more humane. Who was Jeremy Bentham? And, what does he look like? Notice I said "what does he look like. Note: Although Bentham lived and wrote back in the 18th Century you can see what he looks like. Notice I said he. Jeremy Bentham as he still appears in a glass case in University College of London, which he helped to found. Applying calculus to find an expression for the slope of the other curve, the indifference curve: OG/F = - (U/F) /(U/OG) or, using an equivalent notation: OG/F = - MUf/ MUog OG . E UE Budget line Food Consumer equilibrium in indifference curve analysis At an equilibrium, tangency implies that the slope of the budget constraint equals the slope of the indifference curve: Hence, Consumer equilibrium requires that pf/pog = MUf /MUog or MUf /pf = MUog /pog In words: The marginal utility per dollar of expenditure must be equal for each good. OG .E1 E E2 . 3 . Food F1 F3 As income increases, Food demanded increases. This is shown in indifference curve analysis as successive, new equilibria. Income Engel’s Curve F1 F2 F3 Food Consider the shape of the Engels Curve as related to the income elasticity of demand. OG B A Food Stamps Problem budget constraint Food 0 C D When the eligible person is given AB worth of Food Stamps, this extends her budge constraint to ABD. OG Food Stamps Problem budget constraint B A E’ . E . Food 0 D C A case of a Food Stamps recipient for whom the Stamps could just as well have been in cash (rather than “in-kind”). OG . E’’ B A Food Stamps Problem Ucash budget constraint UFStamps .E Food 0 D C A case of a Food Stamps recipient for whom the Stamps could just as well have been in cash (rather than “in-kind”).