1_3150_review

# 1_3150_review - Review of Consumer and Producer Theories...

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Review of Consumer and Producer Theories Econ 3150 York U 1 Review of Technical Concepts 1. Review of producer, consumer and equilibrium theories 2. Open economy equilibrium 3. Excess demand diagram 4. Gains from trade 5. Gains from exchange versus gains from specialization 1. Review of producer, consumer and equilibrium theories 2 goods: X and Y; Px, Py – prices of goods X and Y a) PPF is a concave boundary of a production possibilities set. PPF gives maximum attainable combinations of goods X and Y A- Attainable, given resources B- unattainable Slope of PPF is equal to the Marginal Rate of Transformation (MRT). It is the rate at which producer substitutes between production of X and Y Producer maximizes profits by producing where y x p P MRT = (i.e. tangency between the PPF and the price line) X Y PPF Producer’s PPF Y A B slope y x p p - = Q * is given by y x p p MRT = X

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Econ 3150 York U 2 b) Consumer’s indifference curves Utility U=U(X,Y) Indifference curve gives all combinations of X and Y that yield constant level of utility Slope of indifference curve = Marginal Rate of Substitution in consumption. MRS is a rate at which consumer substitutes Y for X keeping utility constant No two indifference curves for the same individual can intersect Prices are Px and Py, consumer’s income is Y p X p I y x + = => consumer budget line is: X p p p I Y y x y - = optimal consumption C* is given by the tangency between the indifference curve and the budget line: y x p p MRS
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1_3150_review - Review of Consumer and Producer Theories...

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