chapter 2 Budget Constraint 西方经济英文版课件.pptVIP

x2 x1 Budget Set Budget Constraint * The budget set describes what consumption bundles are affordable to the consumers. The budget constraint is typically described by p1 x1 + p2 x2 = m, which is a straight line when prices are constant. When income increases, budget set shifts outward, enlarging the budget set. When prices increases, the slope of budget line changes, and the it shrinks the budget set. * The next chapter will introduce preference, which describes the ordering of what a consumer likes among the consumption bundles. Then we can combine both preference and budget constraint to analyze consumer’s choice. * Original budget set x2 x1 * Original budget set New affordable consumptionchoices x2 x1 Original and new budget constraints are parallel (same slope). * Original budget set x2 x1 * x2 x1 New, smaller budget set Consumption bundles that are no longer affordable. Old and new constraints are parallel. * Increases in income m shift the constraint outward in a parallel manner, thereby enlarging the budget set and improving choice. Decreases in income m shift the constraint inward in a parallel manner, thereby shrinking the budget set and reducing choice. The slope –p1 / p2 does not change. * When income increases, NO original choice is lost and new choices are added, so higher income cannot make a consumer worse off. When income decreases, the consumer may (typically will) be worse off, as one can no longer afford some of the bundles anymore. * What happens if just one price decreases? Suppose p1 decreases. * Original budget set x2 x1 m/p2 m/p1’ m/p1” -p1’/p2 * Original budget set x2 x1 m/p2 m/p1’ m/p1” New affordable choices -p1’/p2 * Original budget set x2 x1 m/p2 m/p1’ m/p1” New affordable choices Budget constraint pivots; slope flattens from -p1’/p2 to -p1”/p2 -p1’/p2 -p1”/p2 * Reducing the price of one commodity pivots the constraint outward. No old choice is lost and new choices are added, so reducing one price