Chapter Two Budget Constraint
Chapter Two Budget Constraint
Where are We in the course? We are working on the 1t of the 3 components of microeconomics: Consumer behavior, production theory, and market There are three elements of consumer behavior: budget constraint, preference, and choices
Where are We in the Course? We are working on the 1st of the 3 components of microeconomics: Consumer behavior, production theory, and market. There are three elements of consumer behavior: budget constraint, preference, and choices
Consumption Choice Sets A consumption choice set is the collection of all consumption choices availlable to the consumer What constrains consumption choice? Budgetary, time and other resource limitations
Consumption Choice Sets A consumption choice set is the collection of all consumption choices available to the consumer. What constrains consumption choice? –Budgetary, time and other resource limitations
Budget Constraints Q: When is a bundle (x,.., Xni affordable at prices p1,.,pn? A: When p11+∴+pnXn≤m where m is the consumers (disposable)income
Budget Constraints Q: When is a bundle (x1 , … , xn ) affordable at prices p1 , … , pn? A: When p1x1 + … + pnxn m where m is the consumer’s (disposable) income
Budget Constraints The consumers budget set is the set of all affordable bundles B(p1…,pnm) (X1,…Xn)|X1≥0,……,xn≥0and p1x1+…+pnXn≤m} The budget constraint is the upper boundary of the budget set
Budget Constraints The consumer’s budget set is the set of all affordable bundles; B(p1 , … , pn , m) = { (x1 , … , xn ) | x1 0, … , xn 0 and p1x1 + … + pnxn m } The budget constraint is the upper boundary of the budget set
Budget set and constraint for Two Commodities X 2 Budget constraint is m /p2 P1X1+ p2X2 m t Not affordable Just affordable Affordable m/p
Budget Set and Constraint for Two Commodities x 2 x1 Budget constraint is p1x1 + p2x2 = m. m /p1 Affordable Just affordable Not affordable m /p2
Budget set and constraint for Two Commodities mP/P是m so slope is-p,p2 Budget Set m /p1
Budget Set and Constraint for Two Commodities x 2 x1 p1x1 + p2x2 = m is x2 = -(p1 /p2 )x1 + m/p2 so slope is -p1 /p2 . m /p1 Budget Set m /p2
Budget Constraints If n =3 what do the budget constraint and the budget set look like?
Budget Constraints If n = 3 what do the budget constraint and the budget set look like?
Budget set for Three Commodities x2{(x1X2x)1x1≥0,x2≥0,x3≥0and m/p2 p1x1+p2X2+p3X3≤m m/p3 m/p
Budget Set for Three Commodities x2 x1 x3 m /p2 m /p1 m /p3 { (x1 ,x2 ,x3 ) | x1 0, x2 0, x3 0 and p1x1 + p2x2 + p3x3 m}
Budget Constraints For n=2 and x on the horizontal axis, the constraint's slope is-p1/p2 What does it mean? P1 1+ p2 p2 Increasing x, by 1 must reduce x2 by p,p
Budget Constraints For n = 2 and x1 on the horizontal axis, the constraint’s slope is -p1 /p2 . What does it mean? Increasing x1 by 1 must reduce x2 by p1 /p2. x p p x m p 2 1 2 1 2 = − +
