Chapter Two Budgetary and other Constraints on choice
Chapter Two Budgetary and Other Constraints on Choice
Contents Describe budget constraint -Algebra Graph Describe changes in budget constraint Government programs and budget constraints Non-linear budget lines
Contents Describe budget constraint –Algebra –Graph Describe changes in budget constraint Government programs and budget constraints Non-linear budget lines
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 A consumption bundle containing x, units of commodity 1, x2 units of commodity 2 and so on up to xn units of commodity n is denoted by the vector ( x, gn Commodity prices are p1p2,……,pn
Budget Constraints A consumption bundle containing x1 units of commodity 1, x2 units of commodity 2 and so on up to xn units of commodity n is denoted by the vector (x1 , x2 , … , xn ). Commodity prices are p1 , p2 , … , pn
Budget Constraints Q: When is a consumption bundle 15 ■■ xn affordable at given prices p1,…,pn?
Budget Constraints Q: When is a consumption bundle (x1 , … , xn ) affordable at given prices p1 , … , pn?
Budget Constraints Q: When is a bundle(x1,.,Xn affordable at prices p,.., 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 bundles that are only just affordable form the consumers budget constraint. This is the set {(X13…xn)|X1≥0,…,xn≥0and p1X1+…+pnXn=m}
Budget Constraints The bundles that are only just affordable form the consumer’s budget constraint. This is the set { (x1 ,…,xn ) | x1 0, …, xn and p1x1 + … + pnxn = m }
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 m|2 Budget constraint is P1X1+ p2X 2=m m/p
Budget Set and Constraint for Two Commodities x 2 x1 Budget constraint is p1x1 + p2x2 = m. m /p1 m /p2
Budget set and constraint for Two Commodities Budget constraint is m /p2 P1X1+ p2X 2=m m/p
Budget Set and Constraint for Two Commodities x 2 x1 Budget constraint is p1x1 + p2x2 = m. m /p2 m /p1