L5Choices - Introduction to Microeconomics Lecture 5...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Introduction to Microeconomics Lecture 5 Choices in Action Ian Crawford
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Review Consumers choose the set of goods they most prefer, out of the set of goods they can afford. We use utility functions/indifference curves to give formal content to “most prefer” We use budget sets/constraints to give formal content to “can afford”.
Background image of page 2
Review In due course this becomes a constrained maximisation problem which you can solve mathematically “Maximise utility, subject to the budget constraint.” So far you’ve learned how to solve the problem graphically for two goods . .. ( 29 1 2 1 2 1 1 2 2 , ,..., max , ,..., subject to ... n n n n x x x u x x x p x p x p x m + + +
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Review 0 x 1 x 2 Optimal choice * 1 x ( 29 * 2 * 1 , x x * 2 x Sub-optimal choice #2 Sub-optimal choice #1
Background image of page 4
Review Given an indifference curve map you can change prices and income and work out the demands each time: Keep this up and you’ll map out the Marshallian Demand Functions { } { } { } { } { } { } 1 2 1 2 1 2 1 2 1 2 1 2 , , , , , , ˆ ˆ ˆ ˆ ˆ , , , p p m x x p p m x x p p m x x % % % % % ( 29 ( 29 1 1 2 2 1 2 , , , , x p p m x p p m
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Outline Properties of Marshallian Demands Measuring changes - elasticities Income Changes Price Changes Decomposing price changes Substitution and income effects The Slutsky Equation Modelling the labour supply (leisure demand) decision - the Working Tax Credit [we may not get this far today]
Background image of page 6
Measuring the Effects of Change – “Elasticities” y depends upon x: Change x a bit: Look at the change in y: We could compare and to measure responsiveness, but the answer would depend on the units. Economists use “elasticities” instead / Proportional change in The elasticity of : / Proportional change in yx y y y x y x x x ε = = ( 29 y f x = ( 29 x x x ∆ = - ( 29 y y y ∆ = - y x
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Measuring the Effects of Change – “Elasticities” Take a Marshallian demand function: 1 1 1 2 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 1 1 1 1 1 / The own price elasticity of demand : / / The cross price elasticity of demand : / / The income elasticity of demand : / x p x p x m x x x p p p p x x x x p p p p x x x x m m m m x ε = = = = = = ( 29 1 1 2 , , x p p m
Background image of page 8
0 x 1 x 2 Measuring the Effects of Change – Income Elasticities 1 x 2 x 1 2 1 1 2 2 / 0 0 / 0 / 0 0 / 0 x m x m x x m m x x m m ε = = = = Both are “ Normal goods
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
x 1 x 2 0 1 x 2 x Measuring the Effects of Change – Income Elasticities 1 2 1 1 2 2 / 0 0 / 0 / 0 0 / 0 x m x m x x m m x x m m ε < = = < = = is a normal good Is an “Inferior Good” x 1 x 2
Background image of page 10
Measuring the Effects of Change – Income Elasticities 0 Inferior Goods 1 Normal Goods “Necessities” “Luxuries” Income Elasticities 0 i x m ε < 0 i x m 0 1 i x m < < 1 i x m <
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1 x 2 Measuring the Effects of Change – Price Elasticities 0 1 x The price of good 1 falls. Demand for good 1 rises
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/12/2010 for the course ECON DEAM taught by Professor Vines during the Spring '10 term at Oxford University.

Page1 / 62

L5Choices - Introduction to Microeconomics Lecture 5...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online