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lecture1 - Microeconomics I Lecture#1 1 Budget Set...

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Microeconomics I - Lecture #1, February 17, 2009 1 Budget Set, Preferences, Consumer’s Optimum People choose the best things they can afford. Every consumer makes a decision about how much to consume of each good. Without any sort of restrictions, we would want to eat as much as we could of everything. However, economics is about choice under scarcity. In particular, each of us has limited money to buy all the things that we like. Hence, we’re going to introduce the budget set constraint. 1.1 The budget set People choose things they can afford. In general, we’ll take prices and the consumer’s income as given. The budget set consists of all bundles of goods that the consumer can afford at given prices and income. We can write down in an equation the amount of each good that I can consume. Assume two goods X and Y , their prices P X and P Y and income I . Then the budget set is given by: P X X + P Y Y I Budget line is given by: Y = I P Y - P X P Y X The absolute easiest way to draw a budget set is to start by figuring out how much of each good I could buy if I spent all my money on it. To find this number, all you need to do is divide your income by the price of each good. You can then put these points on the graph and connect them with a line. That line is the budget set. (Why is the line straight?) The formula tells us how many units of good 2 the consumer needs to consume in order to just satisfy the budget constraint if she is consuming X units of good 1. The slope of the budget line measures the rate at which the market is willing to substitute good 1 for good 2, or opportunity cost of consuming good 1.
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