review_ch9 - Chapter 9 Review: Buying and Selling 9.1 Net...

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Unformatted text preview: Chapter 9 Review: Buying and Selling 9.1 Net and gross demand Suppose the consumer starts off with some endowment of two goods ( ω 1 ,ω 2 ). This is how much of the two goods the consumer has before he enters the market. If need to differentiate between gross demand ( x 1 ,x 2 ) and net demand ( x 1- ω 1 ,x 2- ω 2 ). Note for a net demander or buyer (seller or supplier) of, say, good 1, x 1 > ( < ) ω 1 . 9.2 The budget constraint It must be the case that the value of the of the bundle of goods that she goes home with must be equal to the bundle of goods that she came with. Or, algebraically, p 1 x 1 + p 2 x 2 = p 1 ω 1 + p 2 ω 2 which is in fact the budget line and could be expressed in terms of net demands as p 1 ( x 1- ω 1 ) + p 2 ( x 2- ω 2 ) = 0 1 2 CHAPTER 9. REVIEW: BUYING AND SELLING How does the budget line look like? If you fix prices, the value of endowment and hence money income is fixed, and the budget line is as before. The location of the line can be determined by the following simple observations: the endowment bundle is always on the budget line. Note also that the bundle is always just affordable, since the amount you have to spend is precisely the value of your endowment. Also note that the budget line has a slope of- p 1 /p 2 . The consumer need not demand or consume only his or her endowment. That is x 1 need not equal ω 1 , and neither does x 2 need to be equal to ω 2 . Figure 9.1 shows the optimal consumption bundle ( x * 1 ,x * 2 ), where the slope of the highest possible indifference curve (MRS) is equal to the slope of the budget line (the price ratio). In this case, note in particular that, x * 1 > ω 1 and x * 2 < ω 2 , so the consumer is a net buyer of good 1 and a net seller of good 2. 9.3. CHANGING THE ENDOWMENT 3 9.3 Changing the endowment 9.4 Price changes The first thing to realize is that if the value or price of a good you are selling changes, your money income will certainly change. Thus in the case where the consumer has an endowment, changing prices automatically implies changing income. 4...
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This note was uploaded on 03/14/2010 for the course ECON microecono taught by Professor Yy during the Spring '10 term at Seoul National.

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review_ch9 - Chapter 9 Review: Buying and Selling 9.1 Net...

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