History of Economic Doctrines Lecture 30 Consumer Theory Consumer Theory * Goal: provide foundations for law of demand - preference for simplicity in our models -- no more complex than needed to understand the problem at hand --Weak v. Strong Assertions: weak assertions give more room for generalization - we aim for predictability from models Jevons - influenced by Bentham's felicific calculus: ways to measure utility mathematically - imagined machinelike tabulations of individual utility PROBLEMS 1. Nobody knows how to calculate a "util" 2. Non-additivity: can't add the utility of various goods b/c one depends mightily on another 3. Not interpersonally comparable Cardinal Utility - the differences b/t utility have a consistent meaning (example: 4-3 = 1, 3-2 =1) Kelvin Lancaster - Attributes of Goods -- break down the pleasure/utility you derive from the attributes of a good, not just the the pleasure you derive from the good itself Pareto - utility maximization Ordinal Utility - Assumptions 1. Preferences 2. Consistency 3. Complete * weaker assertions than Jevons - ability to rank, transitivity (example: A > B > C) - provides foundation for Hicks and modern demand theory Kahneman & Tversky - established that people don't know what will make them happy -- you don't know what you will like; you must experience it -- but they know when they are happy

These web pages are significantly edited and elaborated versions of student notes based on lectures by Ralph Byrns, 2002-2005.