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# ch09lec - ECON 306 Chapter 9 Buying and Selling RUST CHO...

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ECON 306 Chapter 9: Buying and Selling RUST, CHO, DIAZ

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Introduction The model of consumer behavior we were working with assumes that income is given exogenously. In reality people earn their income by selling things their own: items that they have produced, assets that they have accumulated or their own labor. Now we are going to expand the original model to make it more realistic. The main difference with respect to our previous analysis is that income becomes an endogenous variable. We will assume that the consumer starts off with an endowment of goods. This endowment is how much of each good the consumer has before he enters the market. The endowment bundle is denoted by . We can distinguish between gross demands and net demands : The gross demand for a good is the amount of the good that the consumer actually consumes. Denote the gross bundle as . The net demand for a good is the amount that is bought or sold of the good. This is just the difference between what the consumer ends up with (the gross demand) and the initial endowment of goods. Therefore we can denote the net bundle as . ) , ( 2 1 Z Z ) , ( 2 1 x x ) , ( 2 2 1 1 Z ± Z ± x x
The Budget Constraint The income level is the value of the endowment bundle. Given the market prices for each good ( p 1 and p 2 ), the value of the endowment bundle is just Notice that the amount of money the consumer has ( m ) is no longer an exogenous variable. Each time the prices or the endowment change, the income level m will change as well. The consumer allocates his income to the consumption of goods, so the value of the consumption bundle must be equal to the income level which is the value of the endowment bundle.Therefore the budget constraint can be written as We can express the budget constraint in terms of net demands as When is positive we say that the consumer is a net buyer (or demander ) of good 1; if it is negative we say that the consumer is a net seller (or supplier ).Therefore the budget constraint says the the value of what the consumer buys must equal the value of what she sells. As before the slope of the budget line is given by the negative of the price ratio - p 1 / p 2 . Notice that the budget line must go through the endowment bundle, this bundle is just affordable for any set of prices. (Fig. 9.1) ± ±² ± ±³ ´ ´ bundle endowment the of Value 2 2 1 1 bundle n consumptio the of Value 2 2 1 1 m p p x p x p { Z ± Z ± 2 2 1 1 Z ± Z p p m 0 2 2 2 1 1 1 Z ² ± Z ² ) ( ) ( x p x p ) ( 1 1 Z ² x

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09.01 In this example the consumer is a net buyer of good 1 and a net seller of good 2.
Comparative Statics: Changing the Endowment Lets look at what happens when the endowment changes while keeping the prices fixed. Denote the new endowment bundle by ( Z 1 , Z 2 ).

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ch09lec - ECON 306 Chapter 9 Buying and Selling RUST CHO...

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