Consumption Country pct GDP amount Australia Banglad Brazil Canada Egypt Germany Japan Thailand U.K U.S

Country GDP per Capita Health Expenditur e per Capita Life Expec t. Average Years in Poor Health Preval- ence of HIV Albania Bangladesh Brazil China Ethiopia Germany Nigeria Russian Fed United States Source: World Bank website, on April 29, Notes: GDP (for 2000) is via the purchasing power parity method; health care expenditures per capita were found by applying the 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.

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

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?

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 = p og OG + p f F  OG = B/p og – p f /p og F Meaning: The budget equation will depict a curve in OG-Food space that is downward sloping (note: its derivative –p f /p og is negative).

Utility, a quantitative measure of satisfaction. a. utility is constant along an indifference curve.

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 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 = - MU f / MU og

At an equilibrium, tangency implies that the slope of the budget constraint equals the slope of the indifference curve: Hence,

Consumer equilibrium requires that p f /p og = MU f /MU og or MU f /p f = MU og /p og In words: The marginal utility per dollar of expenditure must be equal for each good.