Chapter Two Budget Constraint
Chapter Two Budget Constraint
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
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 available 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 (x1,...xn) affordable at prices p,...Pn? A:When px1+..+pnxn≤m where m is the consumer's (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 consumer's budget set is the set of all affordable bundles; B(p1,...,Pn,m)= {(k1,,xn)|x1≥0，，xn≥0and px1+.+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 m Ip2 Budget constraint is P1X1+p2X2 m. 一Not affordable Just affordable Affordable mlpi
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 X 2 mlp2 PiX1 p2x2 m is X2=-(p/p2)x1+m/p2 so slope is -plp2. Budget Set mlp X1
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↑{(1，x2,x3)x1≥0,2≥0，x3≥0and m Ip2 p1x1+p2x2+p3x3≤m] mlp3 3 mlp
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 -p/p2- What does it mean? X2=- X11 P2 P2 Increasing x by 1 must reduce x2 by Pi/P2
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 = − +