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lecture02_slides

lecture02_slides - Econ 121 Intermediate Microeconomics...

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Econ 121. Intermediate Microeconomics. Eduardo Faingold Yale University Lecture 2
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Outline of the course I. Introduction II. Individual choice III. Competitive markets IV. Market failure
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Outline of the course I. Introduction II. Individual choice ± Budget constraint (Ch. 2) ± Preferences (Ch. 3) ± Utility (Ch. 4) ± Consumer problem (Ch. 5) III. Competitive markets IV. Market failure
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Consumer Theory Consumers choose the best consumption bundle they can afford. this is virtually the entire theory in a nutshell but this theory has many surprising consequences Two parts to theory: “can afford” - budget constraint “best” - according to consumers’ preferences 3
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Consumption bundle L goods in the economy, labeled ` D 1; 2; : : : ; L .x 1 ; x 2 ; : : : ; x L / - how much of each good is consumed .p 1 ; p 2 ; : : : ; p L / - prices of each good m - money the consumer has to spend Budget constraint : p 1 x 1 C p 2 x 2 C : : : C p L x L m all non-negative .x 1 ; x 2 ; : : : ; x L / that satisfy this constraint make up the budget set of the consumer. See figure on blackboard. 5
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Two goods theory works with more than two goods, but can’t draw pictures. two goods enough to understand conceptual issues often think of good 2 (say) as a composite good, representing money to spend on other goods. budget constraint becomes: p 1 x 1 C p 2 x 2 m : money spent on good 1 ( p 1 x 1 ) plus the money spent on good 2 (p_2x_2) must be less than or equal to the amount of money available ( m ). 6
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Budget line The set of consumption bundles that satisfy the budget constraint with equality: p 1 x 1 C p 2 x 2 D m ; which can also be written as x 2 D m p 2 p 1 p 2 x 1 budget line has slope of p 1 p 2 and vertical intercept of m p 2 set x 1 D 0 to find vertical intercept ( m p 2 ); set x 2 D 0 to find horizontal intercept ( m p 1 ) slope of budget line measures opportunity cost of good 1 - how much of good 2 you must give up in order to consume more of good 1 7
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Changes in budget line increasing m makes parallel shift out increasing p 1 makes budget line steeper increasing p 2 makes budget line flatter just see how intercepts change multiplying all prices by t same as dividing income by t multiplying all prices and income by t does not change consumption possibilities 8
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The numeraire can arbitrarily assign one price a value of 1 and measure other price (and income) relative to that useful when measuring relative prices; e.g., British pounds per dollar, 1987 dollars versus 1974 dollars, etc.
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