SF Intermediate EconomicsSF中级经济学.pptVIP

SF Intermediate Economics2005/06 Francis O’Toole CONSUMER THEORY We will look at Scarcity: income and prices Tastes Combine scarcity and tastes (i) Individual demand (ii) Market demand SCARCITY 2 Products (Goods or Services): X1 and X2 Fixed money income: M Given prices: p1 and p2 Income constraint: p1X1 + p2X2 = M Rearranging, X2 = M/p2 – (p1/p2)X1 Slope: ?X2/ ?X1 = - (p1/p2) Budget Set and Constraint for Two Products Budget Set and Constraint for Two Products Budget Set and Constraint for Two Products Budget Set and Constraint for Two Products Budget Set and Constraint for Two Products Budget Set and Constraint for Two Products Budget Set and Constraint for Two Products SCARITY Budget Constraint CHANGES IN INCOME CONSTRAINTINCOME CHANGES INCOME CHANGES No original choice is lost and new choices are added when income increases, so higher income will make a consumer better off. Trade off between products [– (p1/p2)] remains unchanged. An income decrease will make the consumer worse off. How do the budget set and budget constraint change as p1 decreases (from p10 to p11)? How do the budget set and budget constraint change as p1 decreases from p10 to p11? How do the budget set and budget constraint change as p1 decreases from p10 to p11? How do the budget set and budget constraint change as p1 decreases from p10 to p1? PRICE CHANGES Reducing the price of one commodity pivots the constraint outward. No old choice is lost and new choices are added, so reducing one price cannot make the consumer worse off. Trade off between products [– (p1/p2)] is changed. Similarly, increasing one price pivots the constraint inwards, reduces choice and cannot make the consumer better off. PRICE CHANGES II Claim: A doubling of all prices is equivalent to halving income. P1X1 + P2X2 = M Let all prices change by a factor of t (e.g. t = 2) (tP1)X1 + (tP2)X2 = M ? P1X1 + P2X2 = M/t (i.e. equivalent to a parallel shift in the income constraint) (Relatuve prices remain uncha