《微观经济学》清华大学-Tsinghua Micro Ch2 020913.pptVIP

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. 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 p1, … , pn? A: When p1x1 + … + pnxn ￡ mwhere 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) ={ (x1, … , xn) | x1 3 0, … , xn 3 0 and p1x1 + … + pnxn ￡ m } The budget constraint is the upper boundary of the budget set. Budget Set and Constraint for Two Commodities Budget Set and Constraint for Two Commodities Budget Constraints If n = 3 what do the budget constraint and the budget set look like? Budget Set for Three Commodities 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. Budget Constraints Budget Sets Constraints; Income and Price Changes The budget constraint and budget set depend upon prices and income. What happens as prices or income change? Higher income gives more choice Budget Constraints - Income Changes No original choice is lost and new choices are added when income increases, so higher income cannot make a consumer worse off. An income decrease may (typically will) make the consumer worse off. Budget Constraints - Price Changes What happens if just one price decreases? Suppose p1 decreases. How do the budget set and budget constraint change as p1 decreases from p1’ to p1”? Budget Constraints - Price Changes Reducing the price of one commodity pivots the constraint outward. No