Advanced economics (lecture 5: consumption theory ye Jianliang Ye
Advanced Economics (lecture 5: consumption theory II) Ye Jianliang
CONTENT Wa and demand law From preferences to utility · Utility maximization EXpenditure minimization
CONTENT • WA and demand law • From preferences to utility • Utility maximization • Expenditure minimization
1. WAand demand law Walrasian demand function x(p, w)satisfied WA if for any (p, w)and(p, w,)we have p·x(p,w)>,ifp·x(p2)≤ w and x(p’,)≠x(p,w) efi
1.WA and demand law • Walrasian demand function x(p,w) satisfied WA if for any we have: See the fig. ( , ) and ( , ) p p w w p x p p x p x p x p ( , ) ,if ( , ) and ( , ) ( , ) w w w w w w
1. WAand demand law Changing in price will change wealth too But how can we tell the demand changing by price changing from wealth changing? Given a changing from(p, w)to(p, w,), and people will not get worse that is w≥p·x(p,w) here wealth changing(compensation) △P=△px(p,) was called" Slutsky wealth compensation and Ap=p'-p Slutsky compensated price changing
1.WA and demand law • Changing in price will change wealth too. But how can we tell the demand changing by price changing from wealth changing? • Given a changing from ,and people will not get worse that is here wealth changing (compensation ) was called “Slutsky wealth compensation” and “(Slutsky) compensated price changing”. ( , ) to ( , ) p p w w w w p x p( , ) = w w p x p( , ) = − p p p
1. WAand demand law Propositions: x(p, w)satisfied WA if and only if: (p'-p)[x(p, w")-x(p, w)]<0 and when x(p,v)≠x(P,w),(p-p)[x(P2)x(p,w)<0 Prop.5 indicates,4p,Ax≤0,orφd≤0 thats called demand law or compensation demand|aW
1.WA and demand law • Proposition5: x(p,w) satisfied WA if and only if: and when , • Prop.5 indicates, , or that’s called “demand law ”, or “compensation demand law ”. ( ) [ ( , ) ( , )] 0 p p x p x p − − w w x p x p ( , ) ( , ) w w ( ) [ ( , ) ( , )] 0 p p x p x p − − w w p x 0 d d p x 0
1. WAand demand law Slutsky matrix(substitution matrix) S(p, w)=(S(p, w) Substitution effects (p,w) (p, w)x(p, w) S(p, w)is n.s. d Giffen good is necessary inferior good ax, (p, w) ax, (p, w) x(p,)≤0
1.WA and demand law • Slutsky matrix (substitution matrix) • Substitution effects • is n.s.d • Giffen good is necessary inferior good. ( , ) ( ( , )) lk n n S w s w p p = ( , ) ( , ) ( , ) ( , ) l l lk k k x w x w s w x w p w = + p p p p S w ( , ) p ( , ) ( , ) ( , ) ( , ) 0 l l ll l l x w x w s w x w p w = + p p p p
2. From preferences to utility Definition: u: X> is a utility function of preference % if x%yeu(x)2u(y),x,yEX Can we always find a utility function of % Maybe If X is finite, there always exist utility function Proposition: only rational% can be represented by a utility function(Nc not S C) Lexicographic preference: rational but no utility function exist
2.From preferences to utility • Definition: is a utility function of preference , if • Can we always find a utility function of ? – Maybe – If X is finite, there always exist utility function. • Proposition1: only rational can be represented by a utility function. (N.C not S.C) • Lexicographic preference: rational but no utility function exist. u :X→ % x y u x u y x y % ( ) ( ), , X % %
2. From preferences to utility Continuity V(x,y"jel,x% y, and x=limx,y=limy thenx% y, or x upper contour setsiyex: y% xj and lower contour sets yeX:x% y)are closure Proposition2: If is continuous, then exist a continuous utility function representing
2.From preferences to utility • Continuity: then ,or x upper contour sets and lower contour sets are closure. • Proposition2:If is continuous, then exist a continuous utility function representing . 1 { , } , ,and lim , lim n n n n n n n n n x y x y x x y y = → → = = % x y % {:} y y x X % {:} y x y X % % %
2. From preferences to utility Desirability: preference is desirable if o is monotone: x,yEX, andy> x, then>x if>x, then y>x, it's strongly monotone is local non-satiation VxeX, and e >o there is a y, that y-xx proposition: is strong monotone, then it's monotone is monotone, it's local non-satiation
2.From preferences to utility • Desirability: preference is desirable if – is monotone: – is local non-satiation: there is a • proposition3: is strong monotone, then it’s monotone; is monotone, it’s local non-satiation. % % x y y x y x , ,and , then X if , then , it's strongly monotone y x y x % x X,and >0 y y x ,that y-x ,and % %
2. From preferences to utility Convexity x upper contour sets are convex Decreasing in marginal rate of substitution people like variety Preferences are convex means utility function is quasi-concave
2.From preferences to utility • Convexity: x upper contour sets are convex. – Decreasing in marginal rate of substitution. – people like variety. • Preferences are convex means utility function is quasi-concave