9.16 eco lecture

9.16 eco lecture - 9/13 Economics Chapter 2 Budget...

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9/13 Economics Chapter 2 Budget Constraint Consumer theory: consumers choose thebest bundles of goods they can afford. This is virtually the entire theory in a nutshell But this theory has some surprising implications Two parts to theory 1. “Can afford”- budget constraint 2. “best”- according to consumers’ preferences Assumptions and Notation Two “goods” (or “commodities” ) called “good1” and “good2” ( or “commodity1” and “ commodity2”) X1, quantity of good 1 X2, quantit ofgood 2 X1 is equal and equal to 0, and x2 is equal and equal to 0 P1, price of good 1 P2, price of good 2 P1 is greater than 0 and p2 is greater than 0 m, the amount of money the consumercan spend (also called “income” in the textbook) m is greater than 0 The ordered pair (x1, x2) (with x1 units of good 1 and x2 units of good 2) is called a “consumption bundle” Q: When is a bundle, (x1, x2), affordable at prices p1,p2? Money spent on good 1=p1x1
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9.16 eco lecture - 9/13 Economics Chapter 2 Budget...

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