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The standard (neo-classical) model of consumer behavior
 

The standard (neo-classical) model of consumer behavior

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Introduction to the assumptions of the standard, rational, utility-maximizing consumer from introductory microeconomics

Introduction to the assumptions of the standard, rational, utility-maximizing consumer from introductory microeconomics

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  • *Announce that if the class shows enthusiasm (high energy), I will close 5 minutes early… (or lecture for 5 minutes v. play a comedy video for 5 minutes. Do only concept 1 first. Then probably say, this enthusiasm was too low, we should get out late. Now switch and try explaining concept 2.
  • *Announce that if the class shows enthusiasm (high energy), I will close 5 minutes early… (or lecture for 5 minutes v. play a comedy video for 5 minutes. Do only concept 1 first. Then probably say, this enthusiasm was too low, we should get out late. Now switch and try explaining concept 2.
  • Classroom note: After giving time ask, “How many groups were able to come up with at least one example (raise your hand).” How many at least 4?, 6?, etc. Ask the group with the most response to report.
  • Here, restate the list given. Was it lack of knowledge of preferences, lack of knowledge of reality, or lack of rational choice?

The standard (neo-classical) model of consumer behavior The standard (neo-classical) model of consumer behavior Presentation Transcript

  • The standard economic model of consumer behavior and some problems with it
    Dr. Russell James III, Texas Tech University
  • What is it?
    The standard, or neo-classical, economic model is the dominant framework for thinking about consumer welfare and consumer choice.
    It is what you will learn in any introductory microeconomics course.
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
    Full Internal Knowledge
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
    People act with full information.
    Full Internal Knowledge
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
    People act with full information.
    Full Internal Knowledge
    Full External Knowledge
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
    People act with full information.
    People choose rationally so as to maximize utility.
    Full Internal Knowledge
    Full External Knowledge
    Maximizing Choices
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
    People act with full information.
    People choose rationally so as to maximize utility.
    Full Internal Knowledge
    Full External Knowledge
    Maximizing Choices
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
    Full Internal Knowledge
    Find one or two partners. Whoever’s last name is first, alphabetically, describe the first concept to your partner as if they had never heard of it before.
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
    People act with full information.
    People choose rationally so as to maximize utility.
    Full Internal Knowledge
    Full External Knowledge
    Maximizing Choices
    Now switch and the other person describes the second one.
    Then switch again for the third one.
  • Advantages of the standard model
    From these three assumptions, consumer behavior can be modeled using beautiful, internally consistent, mathematical models.
    These models often correspond to actual behavior.
  • Beautiful models?
  • Beautiful models!
  • More beautiful models!
  • Beautiful models of color!
    Chart of attainable Pareto and Kaldor-Hicks improvements among the space of exchanges between two participants
  • Enough beautiful models?
  • Perhaps you prefer less “graphic” models?
  • Beautiful mathematical models
    A model of consumer utility for minivans
    From Petrin, A. (2002) Quantifying the benefits of new products: The case of the minivan. Journal of Political Economy, 110(4), 705-729.
  • Advantages of the standard model
    From these three assumptions, consumer behavior can be modeled using beautiful, internally consistent, mathematical models.
    These models often correspond to actual behavior
  • Advantages of the standard model
    From these three assumptions, consumer behavior can be modeled using beautiful, internally consistent, mathematical models.
    These models often correspond to actual behavior
  • From these three assumptions, consumer behavior can be modeled using beautiful, internally consistent, mathematical models.
    These models often correspond to actual behavior
    Pssst. Sometimes the basic assumptions are false
    Advantages of the standard model
  • Assumptions of the Standard Economic Model of Consumer Behavior
    People have known preferences.
    People act with full information.
    People choose rationally so as to maximize utility.
    Full Internal Knowledge
    Full External Knowledge
    Maximizing Choices
  • Do people always choose rationally so as to maximize their utility?
    How often do people choose rationally so as to maximize their utility (or happiness)?
    Always and without exceptions
    Almost always, but with rare exceptions
    Usually, but there are common exceptions
    A little more than half the time
    Less than half the time
  • Do people always choose rationally so as to maximize their utility?
    Work with one, two, or three others around you.
    How many examples can you think of where people do not choose rationally so as to maximize their utility (or happiness)?
    Have one person write down all the examples and write all of your names on the page.
  • For each bad choice: Was the problem 1, 2, or 3?
    People have known preferences.
    People act with full information.
    People choose rationally so as to maximize utility.
    Full Internal Knowledge
    Full External Knowledge
    Maximizing Choices
  • Can we study “irrational” behavior?
    Yes, if it is predictably “irrational”
    The study of these predictable errors that violate the economic assumption of rationality is called…
  • Can we study “irrational” behavior?
    Yes, if it is predictably “irrational”
    The study of these predictable errors that violate the economic assumption of rationality is called…
    Behavioral economics
    http://www.youtube.com/watch?v=Fa-mIosWOK8
  • In the next class, we begin our study of behavioral economics…
  • Slides by:
    Russell James III, J.D., Ph.D., CFP®
    Associate Professor
    Division of Personal Financial Planning
    Texas Tech University
    russell.james@ttu.edu
    Please use these slides!
    If you think you might use anything here in a classroom, please CLICK HEREto let me know. Thanks!
    The outline for this behavioral economics series is at
    http://www.slideshare.net/rnja8c/outline-for-behavioral-economics-course-component