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Lecture4--BUDGETSANDOPPORTUNITYCOST

# Lecture4--BUDGETSANDOPPORTUNITYCOST - We will make up a...

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Unformatted text preview: We will make up a seating plan next week. Please choose a seat you like for the semester.. Course Examination 1 Date: Monday, September 29 s Place: Here (Nelson Auditorium) s Time: 11:20 a.m. - 12:15 p.m. s Coverage: Chapters 1- 6 s Format: 25 multiple-choice questions s Remember to bring a number 2 pencil to the Exam-- Make-ups allowed within one week only exam with medical or other valid excuse. s Budgets and Opportunity Cost How our options are affected by our incomes and the prices of things we want A budget shows how expenditure is limited by income s s Expenditure cannot exceed income unless we borrow How much we can afford depends on both our income and the prices of what we want A Budget Line: Shows feasible combinations of items you can purchase s s s s s s Income=\$100 per 100 month Price of Discs=\$5 Price of gasoline= \$1 50 per gallon The Budget Constraint is \$100= 5R+G Slope = -5/1 0 Slope =-Price of discs/ price of gasoline Gasoline per month (gallons) For points on the budget line, income=expenditure 10 20 Discs per month Gasoline per month (gallons) 100 Changes in Price change the slope of the Budget line 40 0 20 Compact Discs per month Gasoline per month (gallons) 100 Changes in Price change the slope of the Budget line 40 If the Price of Gasoline rises to \$2.50, the maximum amount per month that can be bought with \$100 falls to 40 gallons and the slope becomes -2. 0 20 Compact Discs per month Gasoline per month (gallons) 100 40 When the price of gasoline increases to \$2.50, the opportunity cost of a compact disc falls from 5 to 2 gallons of gasoline even though the money price of recordings remains \$5 0 20 Compact Discs per month Gasoline per month (gallons) 100 Changes in Price change the slope of the Budget line The increase in the price of gasoline also decreases the options available to the consumer 40 0 20 Compact Discs per month The opportunity cost of purchasing and item depends on The Price of the Item s The price of alternative items s The RELATIVE PRICE of an item changes when its money price increases or decreases faster than the average rate of change in the money prices of all items s Gasoline per month (gallons) 100 Changes in Income Shift the Budget line in or out parallel to the original line 40 0 20 Compact Discs per month Gasoline per month (gallons) 100 An increase in income shifts the budget line outward 40 0 20 Compact Discs per month Gasoline per month (gallons) 100 A decrease in income shifts the budget line inward 40 0 20 Compact Discs per month Gasoline per month (gallons) 100 40 A proportionate increase in the price of all goods (INFLATION) is equivalent to a decrease in income 0 20 Compact Discs per month Gasoline per month (gallons) 100 40 A proportionate increase in the price of all goods (INFLATION) is equivalent to a decrease in income 0 20 Compact Discs per month A market is an arrangement through which buyers and sellers meet or communicate and engage in transactions at mutually agreeable prices Supply and Demand in A Market s s Demand is a relationship between price and quantity demanded by buyers Supply is a relationship between price and quantity supplied by sellers Price Supply Demand Quantity Be Sure You know: The major demand determinants s The major supply determinants s The distinction between changes in quantity demanded and changes in demand s The distinction between changes in quantity supplied and changes in supply s The law of demand and the law of supply s ...
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