Consumer Theory 6

Consumer Theory 6 - Economics 21 Intermediate...

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Unformatted text preview: Economics 21 Intermediate Microeconomics Topic 2: Consumer Theory (vi) Buying and Selling I. Buying and Selling Trade involves exchange - when something is bought something else must be sold. What will be bought? What will be sold? Who will be a buyer? Who will be a seller? I. Buying and Selling And how are incomes generated? How does the value of income depend upon commodity prices? How can we put all this together to explain better how price changes affect demands? II. Endowments The list of resource units with which a consumer starts is his endowment Denote a consumers endowment by the vector (omega). II. Endowments For example: Consumer is endowed with 10 units of good 1 and 2 units of good 2 = ( 1 , 2 29 = (10,229 II. Endowments For example: Consumer is endowed with 10 units of good 1 and 2 units of good 2 What is the endowments value? = ( 1 , 2 29 = (10,229 II. Endowments For example: Consumer is endowed with 10 units of good 1 and 2 units of good 2 What is the endowments value? For which consumption bundles may it be exchanged? = ( 1 , 2 29 = (10,229 II. Endowments If p 1 = 2 and p 2 = 3, then endowment value is: Q: For which consumption bundles may the endowment be exchanged? A: For any bundle costing no more than the endowments value. ( 1 , 2 29 = (10,229 p 1 1 + 2 2 = 2 10 ( 29 + 3 2 ( 29 = 26 III. Budget Constraints Revisited So, given p 1 and p 2 , the budget constraint for a consumer with an endowment is: The budget set is thus: ( 1 , 2 29 p 1 x 1 + 2 2 = 1 1 + 2 2 ( x 1 , x 2 ) p 1 { 1 + 2 2 1 1 + 2 2 , 1 0, 2 0 } x 2 x 1 w 1 w 2 Figure 1: Initial Endowment p 1 x 1 + 2 2 = 1 1 + 2 2 x 2 x 1 w 1 w 2 Budget set p 1 x 1 + 2 2 = 1 1 + 2 2 ( x 1 , x 2 ) p 1 { 1 + 2 2 1 1 + 2 2 , 1 0, 2 0 } Figure 1: Initial Endowment x 2 x 1 w 1 w 2 p 1 x 1 + 2 2...
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This note was uploaded on 07/16/2010 for the course ECON 21 taught by Professor Johng.sessions during the Summer '09 term at Dartmouth.

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Consumer Theory 6 - Economics 21 Intermediate...

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