Lecture1 - CONSUMER THEORY We will look at 1. 2. 3....

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CONSUMER THEORY We will look at 1. Scarcity: income and prices 2. Tastes 3. Combine scarcity and tastes (i) Individual demand (ii) Market demand
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SCARCITY 2 Products (Goods or Services): X 1 and X 2 Fixed money income: M Given prices: p 1 and p 2 Income constraint: p 1 X 1 + p 2 X 2 = M Rearranging, X 2 = M/p 2 – (p 1 /p 2 )X 1 Slope: δ X 2 / δ X 1 = - (p 1 /p 2 )
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Budget Set and Constraint for Two Products x 2 x 1 Budget constraint is p 1 x 1 + p 2 x 2 = m m /p 1 m /p 2
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Budget Set and Constraint for Two Products x 2 x 1 m /p 2 m /p 1 Budget constraint is p 1 x 1 + p 2 x 2 = m
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Budget Set and Constraint for Two Products x 2 x 1 m /p 1 Just affordable m /p 2
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Budget Set and Constraint for Two Products x 2 x 1 m /p 1 Just affordable Not affordable m /p 2
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Budget Set and Constraint for Two Products x 2 x 1 m /p 1 Affordable (irrational) Just affordable Not affordable m /p 2
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Two Products x 2 x 1 m /p 1 Budget Set the collection of all affordable bundles. m
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Lecture1 - CONSUMER THEORY We will look at 1. 2. 3....

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