lecture2 - Professor Jay Bhattacharya Spring 2001 Econ...

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Unformatted text preview: Professor Jay Bhattacharya Spring 2001 Econ 11--Lecture 2 1 Spring 2001 Econ 11--Lecture 2 1 The Theory of the Consumer Model of individual choice: Consumers choose the best bundle of goods and services that they can afford . 1) afford: depends upon opportunities / budget constraints 2) best: depends upon preferences 3) choose: assumes optimizing (goal oriented) behavior Spring 2001 Econ 11--Lecture 2 2 Budget Constraints A consumer must choose among bundles of goods: ( x 1 , x 2 , x n ) example: (fish, beef, milk, CDs, books). Each good has a price: ( p 1 , p 2 p n ). The consumer has income I to spend on goods. Spring 2001 Econ 11--Lecture 2 3 Two Good Case Consider the case of 2 goods ( x 1 , x 2 ) (e.g.., video games, baby food). Lets say the price of these goods are p 1 , p 2 . A bundle (x 1 , x 2 ) is affordable (in the budget set) if and only if p 1 x 1 + p 2 x 2 I . The set of affordable bundles is the budget set . Spring 2001 Econ 11--Lecture 2 4 Budget Set x 1 x 2 p 1 x 1 + p 2 x 2 I 1 p I 2 p I 2 1 p p slope = Spring 2001 Econ 11--Lecture 2 5 Budget Line x 1 x 2 p 1 x 1 + p 2 x 2 I 1 p I 2 p I 2 1 p p slope = Spring 2001 Econ 11--Lecture 2 6 Budget Line Facts The budget line intersects the x 1 axis at I / p 1 The budget line intersects the x 2 axis at I / p 2 The slope of the budget line is -p 1 /p 2 How do you show this?...
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This note was uploaded on 02/11/2012 for the course ECON 51 taught by Professor Tendall,m during the Fall '07 term at Stanford.

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lecture2 - Professor Jay Bhattacharya Spring 2001 Econ...

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