Ch9 - Chapter Nine Buying and Selling Buying and Selling...

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Unformatted text preview: Chapter Nine Buying and Selling 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? 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? Endowments ◆ The list of resource units with which a consumer starts is his endowment . ◆ A consumer’s endowment will be denoted by the vector (omega). ϖ Endowments ◆ E.g. states that the consumer is endowed with 10 units of good 1 and 2 units of good 2. ϖ ϖ ϖ = = ( , ) ( , ) 1 2 10 2 Endowments ◆ E.g. states that the consumer is endowed with 10 units of good 1 and 2 units of good 2. ◆ What is the endowment’s value? ◆ For which consumption bundles may it be exchanged? ϖ ϖ ϖ = = ( , ) ( , ) 1 2 10 2 Endowments ◆ p 1 =2 and p 2 =3 so the value of the endowment is ◆ Q: For which consumption bundles may the endowment be exchanged? ◆ A: For any bundle costing no more than the endowment’s value. ( , ) ( , ) ϖ ϖ 1 2 10 2 = p p 1 1 2 2 2 10 3 2 26 ϖ ϖ + = × + × = Budget Constraints Revisited ◆ So, given p 1 and p 2 , the budget constraint for a consumer with an endowment is ◆ The budget set is ( , ) ϖ ϖ 1 2 p x p x p p 1 1 2 2 1 1 2 2 + = + ϖ ϖ . { } ( , ) , , . x x p x p x p p x x 1 2 1 1 2 2 1 1 2 2 1 2 0 0 + ≤ + ≥ ≥ ϖ ϖ Budget Constraints Revisited x 2 x 1 ϖ 1 ϖ 2 p x p x p p 1 1 2 2 1 1 2 2 + = + ϖ ϖ Budget Constraints Revisited x 2 x 1 ϖ 1 ϖ 2 p x p x p p 1 1 2 2 1 1 2 2 + = + ϖ ϖ Budget set { } ( , ) , , x x p x p x p p x x 1 2 1 1 2 2 1 1 2 2 1 2 + ≤ + ≥ ≥ ϖ ϖ Budget Constraints Revisited x 2 x 1 ϖ 1 ϖ 2 p x p x p p 1 1 2 2 1 1 2 2 + = + ϖ ϖ p x p x p p 1 1 2 2 1 1 2 2 ' ' ' ' + = + ϖ ϖ Budget Constraints Revisited x 2 x 1 ϖ 1 ϖ 2 p x p x p p 1 1 2 2 1 1 2 2 + = + ϖ ϖ p x p x p p 1 1 2 2 1 1 2 2 ' ' ' ' + = + ϖ ϖ Budget set Budget Constraints Revisited...
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This note was uploaded on 01/06/2012 for the course ECON 102 taught by Professor Goodhart during the Spring '11 term at Abu Dhabi University.

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Ch9 - Chapter Nine Buying and Selling Buying and Selling...

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