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1、ChapterTwoBudgetConstraintWhereareWeintheCourse?Weareworkingonthe1stofthe3componentsofmicroeconomics:Consumerbehavior,productiontheory,andmarket.Therearethreeelementsofconsumerbehavior:budgetconstraint,preference,andchoices.ConsumptionChoiceSetsAconsumptionchoicesetistheco
2、llectionofallconsumptionchoicesavailabletotheconsumer.Whatconstrainsconsumptionchoice?Budgetary,timeandotherresourcelimitations.BudgetConstraintsQ:Whenisabundle(x1,…,xn)affordableatpricesp1,…,pn?A:When p1x1+…+pnxn£mwheremistheconsumer’s(disposable)income.BudgetConstraintsT
3、heconsumer’sbudgetsetisthesetofallaffordablebundles; B(p1,…,pn,m)= {(x1,…,xn)
4、x1³0,…,xn³0and p1x1+…+pnxn£m}Thebudgetconstraintistheupperboundaryofthebudgetset.BudgetSetandConstraintforTwoCommoditiesx2x1Budgetconstraintisp1x1+p2x2=m.m/p1AffordableJustaffordableNotaffordable
5、m/p2BudgetSetandConstraintforTwoCommoditiesx2x1p1x1+p2x2=misx2=-(p1/p2)x1+m/p2soslopeis-p1/p2.m/p1BudgetSetm/p2BudgetConstraintsIfn=3whatdothebudgetconstraintandthebudgetsetlooklike?BudgetSetforThreeCommoditiesx2x1x3m/p2m/p1m/p3{(x1,x2,x3)
6、x1³0,x2³0,x3³0andp1x1+p2x2+p3x3£m
7、}BudgetConstraintsForn=2andx1onthehorizontalaxis,theconstraint’sslopeis-p1/p2.Whatdoesitmean?Increasingx1by1mustreducex2byp1/p2.BudgetConstraintsx2x1Opp.costofanextraunitof commodity1isp1/p2units foregoneofcommodity2.And theopp.costofanextra unitofcommodity2is p2/p1unitsfo
8、regone ofcommodity1.-p2/p1+1BudgetSets&Constraints;IncomeandPriceChangesThebudgetconstraintandbudgetsetdependuponpricesandincome.Whathappensaspricesorincomechange?HigherincomegivesmorechoiceOriginalbudgetsetNewaffordableconsumption choicesx2x1Originalandnewbudgetconstraint
9、sareparallel(sameslope).BudgetConstraints-IncomeChangesNooriginalchoiceislostandnewchoicesareaddedwhenincomeincreases,sohigherincomecannotmakeaconsumerworseoff.Anincomedecreasemay(typicallywill)maketheconsumerworseoff.BudgetConstraints-PriceChangesWhathappensifjustoneprice
10、decreases?Supposep1decreases.Howdothebudgetsetandbudgetconstraintchangeasp1decreasesfromp
