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Unformatted text preview: Lecture 11 27 October 2009 EC1000 A. Cohen 1 E C O N O M I C S PARKIN BADE Lecture 11 27 October 2009 E C O N O M I C S PARKIN BADE Chapter 9 Possibilities, Preferences, and Choices Chapter 9 Overview Alternative treatment consumer choice and utility maximization Indifference Curve Analysis of how household chooses to allocate income among goods and services. 4 parts to model: 1. consumption possibilities -- budget line 2. preferences -- indifference curves 3. use 1 & 2 utility maximizing choice 4. predictions of model Lecture 11 27 October 2009 EC1000 A. Cohen 2 Consumption Possibilities continued P P m p = P P P Q Q Y p p m p m = Budget line shows limits to consumption, given income and prices. Consider example of movies (horizontal axis) and pop (vertical axis) Budget equation relative price of movies in terms of pop Affordable Unaffordable Income Movies Pop $40 $8 $4 Figure 9.1 The Budget Line 2 8 10 Pop Movies 2 4 6 8 4 1 3 5 7 9 10 6 A B C D E F Qp = 10 2Qm Budget equation relative price of movies in terms of pop Intercepts measure real income in movies ( x-intercept), pop ( y-intercept) P m flatter budget line, fixed pop-intercept P p steeper budget line, fixed movie- intercept Y leftward parallel shift budget line continued P P m p = P P Q Q Y p p m p m = P Lecture 11 27 October 2009 EC1000 A. Cohen 2 Consumption Possibilities...
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- Fall '08