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PROFESSOR: We've been talking so far about basically overviews of supply and demand relationships and understanding how markets work.

Now we're going to step back and get behind the supply and demand curves and understand where those curves themselves come from. So we talked about, given that we have supply and demand curves, how they interact. Now we're going to get behind that and see where these curves actually come from.

Thank you, by the way for coming down. I appreciate it. So what we're going to do is, we're going to start with the demand curve, and we're going to spend the next few lectures talking about consumers and how consumer preferences are ultimately what leads to the construction of the demand curve.

Then after that and after the first exam — that will cover what's on the first exam — after the first exam, we'll start talking about firms and what determines the firm supply curve.

So today we'll talk about consumers and we're going to talk about where the demand curve comes from. And where it comes from, and where all consumer behavior coming from in economics is from utility maximization.

That's where everything with consumers starts is with utility maximization. That's the basic building block of consumer behavior. And basically, utility maximization — that's what this lecture will be about, describing it.

But basically, an overview is, we posit some type of preferences. We posit consumer preferences, what consumers would like. We posit some budget constraint, what resources consumers have to get what they'd like. And then we do a constrained maximization problem that says, given your preferences, given what you'd like, subject to the resources you have available, what choices will you make?

And in particular, we're going to ask, the term we'll use is we'll ask what bundle of goods makes you the best off?

Given your preference, given your constraints, what bundle of goods? So think about consumers choosing across a set of goods.

Typically, we'll think about two goods because graphs are easier to think about two dimensions than more. So we'll typically think about trading off two goods. So

think about consumers with preferences across two goods, some budget they can allocate, and how they make those choices.

But this basic framework applies to the multiplicity of choices we all make along many, many dimensions. So doing two dimensions as one of the simplifying assumptions I'll talk about. But that's just a simplifying assumption. So basically what we we're going to do is we're going to go through this in three steps, not just in this lecture, but over the next few lectures.

Step one, is we're going to talk about what assumptions we make about preferences. So I'll talk today about preference assumptions. So the axioms that underlie how economists model consumer preferences.

We'll then talk about how we translate these preferences assumptions into mathematical tractability through the use of the utility function, which is basically a mathematical representation of underlying consumer preferences.

So we'll talk about how we basically take these preferences and translate them into something that we can work with here at MIT by making it mathematical, by making a utility function. And then finally, we'll talk about budget constraints. And armed with these three things, we'll then be able to model how consumers make decisions.

Now, importantly for today's lecture, we are not dealing with budget constraints.

Now we're going to step back and get behind the supply and demand curves and understand where those curves themselves come from. So we talked about, given that we have supply and demand curves, how they interact. Now we're going to get behind that and see where these curves actually come from.

Thank you, by the way for coming down. I appreciate it. So what we're going to do is, we're going to start with the demand curve, and we're going to spend the next few lectures talking about consumers and how consumer preferences are ultimately what leads to the construction of the demand curve.

Then after that and after the first exam — that will cover what's on the first exam — after the first exam, we'll start talking about firms and what determines the firm supply curve.

So today we'll talk about consumers and we're going to talk about where the demand curve comes from. And where it comes from, and where all consumer behavior coming from in economics is from utility maximization.

That's where everything with consumers starts is with utility maximization. That's the basic building block of consumer behavior. And basically, utility maximization — that's what this lecture will be about, describing it.

But basically, an overview is, we posit some type of preferences. We posit consumer preferences, what consumers would like. We posit some budget constraint, what resources consumers have to get what they'd like. And then we do a constrained maximization problem that says, given your preferences, given what you'd like, subject to the resources you have available, what choices will you make?

And in particular, we're going to ask, the term we'll use is we'll ask what bundle of goods makes you the best off?

Given your preference, given your constraints, what bundle of goods? So think about consumers choosing across a set of goods.

Typically, we'll think about two goods because graphs are easier to think about two dimensions than more. So we'll typically think about trading off two goods. So

think about consumers with preferences across two goods, some budget they can allocate, and how they make those choices.

But this basic framework applies to the multiplicity of choices we all make along many, many dimensions. So doing two dimensions as one of the simplifying assumptions I'll talk about. But that's just a simplifying assumption. So basically what we we're going to do is we're going to go through this in three steps, not just in this lecture, but over the next few lectures.

Step one, is we're going to talk about what assumptions we make about preferences. So I'll talk today about preference assumptions. So the axioms that underlie how economists model consumer preferences.

We'll then talk about how we translate these preferences assumptions into mathematical tractability through the use of the utility function, which is basically a mathematical representation of underlying consumer preferences.

So we'll talk about how we basically take these preferences and translate them into something that we can work with here at MIT by making it mathematical, by making a utility function. And then finally, we'll talk about budget constraints. And armed with these three things, we'll then be able to model how consumers make decisions.

Now, importantly for today's lecture, we are not dealing with budget constraints.

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