# lecture_1 - Budget Constraints Budgetary and Other...

This preview shows pages 1–19. Sign up to view the full content.

ECOS1001 L1 1 Budgetary and Other Constraints on Choice 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 Budget Constraints

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

View Full Document
ECOS1001 L1 2 Budget Constraints A consumption bundle containing x1 units of commodity 1, x2 units of commodity 2 and so on up to xn units of commodity n is denoted by the vector (x1, x2, … , xn). Commodity prices are p1, p2, … , pn. Q: When is a consumption bundle (x1, … , xn) affordable at given prices p1, … , pn?
ECOS1001 L1 3 When p 1 x 1 + … + p n x n m where m is the consumer’s (disposable) income. 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 }. Budget Constraints

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

View Full Document
ECOS1001 L1 4 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 Constraints
ECOS1001 L1 5 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

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

View Full Document
ECOS1001 L1 6 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 2 m /p 1
ECOS1001 L1 7 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 Affordable Just affordable Not affordable m /p 2

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

View Full Document
ECOS1001 L1 8 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 Budget Set the collection of all affordable bundles. m /p 2
ECOS1001 L1 9 Budget Set and Constraint for Two Commodities 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 . m /p 1 Budget Set m /p 2

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

View Full Document
ECOS1001 L1 10 Budget Constraints • For n = 2 and x 1 on the horizontal axis, the constraint’s slope is -p 1 /p 2 . What does it mean? 2 1 2 1 2 p m x p p x + =
ECOS1001 L1 11 Budget Constraints • For n = 2 and x 1 on the horizontal axis, the constraint’s slope is -p 1 /p 2 . What does it mean? • Increasing x 1 by 1 must reduce x 2 by p 1 /p 2. 2 1 2 1 2 p m x p p x + =

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

View Full Document
ECOS1001 L1 12 Budget Constraints x 2 x 1 Slope is -p 1 /p 2 +1 -p 1 /p 2
ECOS1001 L1 13 Budget Constraints x 2 x 1 +1 -p 1 /p 2 Opp. cost of an extra unit of commodity 1 is p 1 /p 2 units foregone of commodity 2.

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

View Full Document
ECOS1001 L1 14 Budget Constraints x 2 x 1 Opp. cost of an extra unit of commodity 1 is p 1 /p 2 units foregone of commodity 2. And the opp. cost of an extra unit of commodity 2 is p 2 /p 1 units foregone of commodity 1. -p 2 /p 1 +1
ECOS1001 L1 15 Budget Sets & Constraints; Income and Price Changes • The budget constraint and budget set depend upon prices and income. What happens as prices or income change?

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

View Full Document
ECOS1001 L1 16 How do the budget set and budget constraint change as income m increases?
ECOS1001 L1 17 Higher income gives more choice Original budget set New affordable consumption choices x 2 x 1 Original and new budget constraints are parallel (same slope).

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

View Full Document
ECOS1001 L1 18 Budget Constraints - Income
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 04/20/2010 for the course ECOS 2001 taught by Professor None during the One '09 term at University of Sydney.

### Page1 / 82

lecture_1 - Budget Constraints Budgetary and Other...

This preview shows document pages 1 - 19. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online