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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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 Winter '09
 ALLALILEEVA

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