econ212 lecture3

# econ212 lecture3 - Lecture 3 Chapter 2 Budget Textbook...

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Lecture 3 – Chapter 2 Budget Textbook Appendix on Math Workouts in Intermediate Microeconomics Practice Problems #1 Lecture notes Math Review Chapter 2

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Three Dimensional Surface
More Complicated Three Dimensional Surface

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A view from the side
Consumer Theory Consumers choose the best bundles of goods they can afford. “can afford” – constraint: time, money. Chapter 2 Budget Constraint “best bundle” – according to consumer’s preferences. Chapter 3 Preferences

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Outline of Chapter on Budget Constraint The budget constraint and the budget set Two goods vs more goods Properties of the budget set Changes in the budget set Numeraire Examples: taxes, subsidies, rationing
Consumption Choice Sets A consumption choice set is the collection of all consumption choices available to the consumer. What constrains consumption choice? Budgetary, time and other resource limitations.

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Budget Constraints A consumption bundle containing x 1 units of commodity 1, x 2 units of commodity 2 and so on up to x n units of commodity n is denoted by the vector (x 1 , x 2 , … , x n ). Commodity prices are p 1 , p 2 , … , p n .
Budget Constraints Q: When is a consumption bundle (x 1 , … , x n ) affordable at given prices p 1 , … , p n ?

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Budget Constraints Q: When is a bundle (x 1 , … , x n ) affordable at prices p 1 , … , p n ? A: When p 1 x 1 + … + p n x n m where m is the consumer’s (disposable) income.
Budget Constraints The bundles that are only just affordable form the consumer’s budget constraint. This is the set { (x 1 ,…,x n ) | x 1 0, …, x n ≥ 0 and p 1 x 1 + … + p n x n = m }.

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Budget Constraints The consumer’s budget set is the set of all affordable bundles; B(p 1 , … , p n , m ) = { (x 1 , … , x n ) | x 1 0, … , x n 0 and p 1 x 1 + … + p n x n m } The budget constraint is the upper boundary of the budget set.
Budget Set and Constraint for Two Commodities x 2 x 1 Budget constraint is p 1 x 1 + p 2 x 2 = m. m /p 1 m /p 2

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x 2 x 1 Budget constraint is p 1 x 1 + p 2 x 2 = m. m /p 2 m /p 1
x 2 x 1 Budget constraint is p 1 x 1 + p 2 x 2 = m. m /p 1 Just affordable m /p 2

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x 2 x 1 Budget constraint is p 1 x 1 + p 2 x 2 = m. m /p 1 Just affordable Not affordable m /p 2
x 2 x 1 Budget constraint is p 1 x 1 + p 2 x 2 = m. m /p 1 Affordable Just affordable Not affordable m /p 2

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x 2 x 1 Budget constraint is p 1 x 1 + p 2 x 2 = m. m /p 1 Budget Set the collection of all affordable bundles. m /p 2
x 2 x 1 p 1 x 1 + p 2 x 2 = m is x 2 = -(p 1 /p 2 )x 1 + m /p 2 so slope is -p 1 /p 2 .

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## This note was uploaded on 01/26/2010 for the course ECONOMICS EC212 taught by Professor Yu during the Spring '08 term at Mt. Holyoke.

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econ212 lecture3 - Lecture 3 Chapter 2 Budget Textbook...

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