Principles of Economics sylvain经济学原理西尔.barde.free.fr.pptVIP

Application to economics Consumer choice Profit maximisation Application to economics Last week we saw how to find a constrained maximum: i.e.: finding the maximum of a function within a space defined by a set of constraints This is a methodology that is often used in economics We will see 2 examples today, based on the week 9 exercises Application to economics Consumer choice Maximising profits Consumer choice How do we use constrained optimisation to understand the choice of agents? We need a function to maximise: This will be the utility function This is our ‘satisfaction function’, which tells us how satisfied we are when we consume certain goods We need a constraint: This is simply the consumer’s budget It depends on income and prices Consumer choice As for last week’s example, the 3-D function is represented by contours Lines of constant utility The budget constraint ? ? Good 2 Good 1 The budget constraint is Dividing by p1 and rearranging: slope intercept The budget constraint Any bundle within the budget constraint is affordable , but not all the budget is spent (C,D). Any bundle beyond the budget constraint cannot be afforded (H,G). C H D G Any bundle on the budget constraint is affordable and ensures all the budget is spent (E,F). ? ? F E Good 2 Good 1 The budget constraint ? ? Budget constraint Budget set Good 2 Good 1 The optimal consumer choice ? ? Which is the best bundle ? ? F Here ! ? C ? D ? E ? B ? A Good 2 Good 1 The Lagrangian method Formally the Lagrangian is Differentiating The Lagrangian method The ratio of the two conditions gives: This can be expressed as Application to economics Consumer choice Maximising profits Maximising profits Another example is the maximisation of profits by firms The nice aspect is that it illustrates how constrained maximisation is just another form of free maximisation !! We need a function to maximise: This is the revenue function: the revenue made from selling a given quantity of output We need a constra