Lecture+1+_Econ+100A_

Lecture+1+_Econ+100A_ - • Budget constraint Budget...

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Lecture 1 (Aug. 25) The Budget Constraint Econ 100A Fall 2011 Prof. Santesteban
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Econ 100A Most important course you will take at Berkeley (if you’re serious about learning economics) Foundational to all “fun” applied topics in economics Fiscal policy, antitrust policy, firm strategy, labor market behavior, auction design, firm pricing, etc. Please learn this material well or else you will suffer in the future
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About Me Electrical Engineering major (UT Austin) Economics Ph.D. (Stanford) Consultant for 10 years at Compass Lexecon Staff econ for Clinton’s Council of Economic Advisors Independent consultant and university lecturer (Berkeley and Stanford) for the last 2 years
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Introduction Economic model = a simplification of reality Two goods Income What bundle of goods can we afford?
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Unformatted text preview: • Budget constraint! Budget Constraint: Elements • M = Income • P1 = Price of good 1 • P2 = Price of good 2 • x1 = Units of good 1 consumed • x2 = Units of good 2 consumed Budget Constraint x1 ∙ P1 + x2 ∙ P2 <= M • This says that what a consumer can afford of goods 1 and 2 must be less than or equal to his income. • Budget Constraint versus Budget Line • If you want one more unit of x1, how much do you have to give up of x2? • This is concept of opportunity cost. • What is the opportunity cost x2? Price Changes Endogenous Income • Trickier • What is the budget set – mathematically and graphically? Endogenous Income Endogenous Income • Composite good • Kinked budget sets...
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Lecture+1+_Econ+100A_ - • Budget constraint Budget...

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