1 Intermediate Microeconomics Budget Sets. 2 Consumer Theory First part of class we want to understand “demand”. We want to do so from “first principles”.

Slides:



Advertisements
Similar presentations
Chapter 5 Appendix Indifference Curves
Advertisements

Indifference Curves and
1 Intermediate Microeconomic Theory Market Demand.
Consumer Behavior Esa Unggul University Budget Constraints Preferences do not explain all of consumer behavior. Budget constraints also limit an.
Chapter 2 BUDGET CONSTRAINT. 2.1 The Budget Constraint Consumers choose the BEST bundle of goods they can AFFORD. Budget set: affordability Consumption.
1 Intermediate Microeconomics Budget Sets. 2 Consumer Theory Consumer Theory - a model to describe how individuals behave. How do individuals choose what.
Consumer Theory.
Consumer Equilibrium and Market Demand Chapter 4.
Consumer Choice Theory. Overview Over the last several weeks, we have taken demand and supply curves as given. We now start examining where demand and.
Intermediate Microeconomic Theory
Budget Set and Constraint for Two Commodities x2x2 x1x1 Budget constraint is p 1 x 1 + p 2 x 2 = m. m /p 2 m /p 1.
Budget Constraints  The bundles that are only just affordable form the consumer’s budget constraint. This is the set { (x 1,…,x n ) | x 1  0, …, x n.
Consumer Theory Consumers choose the best bundles of goods they can afford. 1.Can afford – Budget constraints. 2.“Best” – according to preferences. Why.
UNIT I: Theory of the Consumer
Part 2 Demand © 2006 Thomson Learning/South-Western.
Chapter Two Budgetary and Other Constraints on Choice.
Theory of Consumer Behavior Basics of micro theory: how individuals choose what to consume when faced with limited income? Components of consumer demand.
1 Rational Consumer Choice APEC 3001 Summer 2007 Readings: Chapter 3 & Appendix in Frank.
SF Intermediate Economics 2005/06 Francis O’Toole.
Chapter Two Budgetary and Other Constraints on Choice.
Intermediate Microeconomic Theory
CONSUMER CHOICE The Theory of Demand.
1 Intermediate Microeconomics Preferences. 2 Consumer Behavior Budget Set organizes information about possible choices available to a given consumer.
CHAPTER 10 The Rational Consumer. 2 What you will learn in this chapter: How consumers choose to spend their income on goods and services Why consumers.
Course: Microeconomics Text: Varian’s Intermediate Microeconomics 1.
Course: Microeconomics Text: Varian’s Intermediate Microeconomics.
Chapter 4 Understanding Demand Yoliann Pons Period.5
Chapter 5 Constraints, Choices, and Demand McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
Chapter 2 Budget Constraint uRequired reading: whole chapter uExercises: 1.Review Questions #1, 2, 3, 4, 5, 6, 7 on p.32.
Chapter 2 Budget Constraint. 2 Consumption Theory Economists assume that consumers choose the best bundle of goods they can afford. In this chapter, we.
1 Intermediate Microeconomic Theory Demand. 2 Demand Analysis In analyzing individual’s behavior regarding a given good, we start with a consumer’s demand.
Managerial Economics & Business Strategy
Consumer behaviorslide 1 CONSUMER BEHAVIOR Preferences. The conflict between opportunities and desires. Utility maximizing behavior.
© 2003 McGraw-Hill Ryerson Limited The Logic of Individual Choice: The Foundation of Supply and Demand Chapter 8.
Module 12: Indifference Curves and Budget Constraints
Principles of Microeconomics
6.1 Chapter 7 – The Theory of Consumer Behavior  The Theory of Consumer behavior provides the theoretical basis for buyer decision- making and the foundation.
The Theory of Consumer Choice
1 Intermediate Microeconomics Choice. 2 Optimal Choice We can now put together our theory of preferences with our budget constraint apparatus and talk.
1 Intermediate Microeconomic Theory Labor Supply.
Chapter 3 Consumer Behavior. Chapter 32©2005 Pearson Education, Inc. Introduction How are consumer preferences used to determine demand? How do consumers.
1 Intermediate Microeconomic Theory Factor Demand/Firm Behavior.
1 Intermediate Microeconomic Theory Buying and Selling.
1 Intermediate Microeconomics Budget Sets. 2 Consumer Theory First part of class we want to understand “demand”. We want to do so from “first principles”.
1 Intermediate Microeconomic Theory Market Demand.
Chapter 3 Consumer Behavior. Chapter 32©2005 Pearson Education, Inc. Introduction How are consumer preferences used to determine demand? How do consumers.
ECON107 Principles of Microeconomics Week 9 NOVEMBER w/11/2013 Dr. Mazharul Islam Chapter-8.
1 Intermediate Microeconomics Utility Theory. 2 Utility A complete set of indifference curves tells us everything we need to know about any individual’s.
CHAPTER 10 The Rational Consumer.
Utility Maximization. Utility and Consumption ▫Concept of utility offers a way to study choices that are made in a more or less rational way. ▫Utility.
1 Intermediate Microeconomic Theory Firm Behavior.
1 Intermediate Microeconomics Budget Sets. 2 Consumer Theory First part of class we want to understand “demand”. We want to do so from “first principles”.
Intermediate Microeconomics
Lecture by: Jacinto Fabiosa Fall 2005 Consumer Choice.
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair Prepared by: Fernando & Yvonn Quijano 6 Chapter Household Behavior.
© 2010 W. W. Norton & Company, Inc. 2 Budgetary and Other Constraints on Choice.
Intermediate Microeconomic Theory Intertemporal Choice.
A Few Applications of Review Material Budget Constraints Isocosts Utility Functions Production Functions.
Labor Supply. What is a labor supply curve? What is its shape? Why?
PRINCIPLES OF ECONOMICS Chapter 6 Consumer Choices PowerPoint Image Slideshow.
BUDGET CONSTRAINT.
Intermediate Microeconomic Theory
Intermediate Microeconomic Theory
Intermediate Microeconomic Theory
Household Behavior and Consumer Choice
CH6:Household Behavior and Consumer Choice Asst. Prof. Dr. Serdar AYAN
Household Behavior and Consumer Choice Asst. Prof. Dr. Serdar AYAN
BUDGET CONSTRAINT.
Applications of Consumer Theory
Chapter 2 Budget Constraint
Presentation transcript:

1 Intermediate Microeconomics Budget Sets

2 Consumer Theory First part of class we want to understand “demand”. We want to do so from “first principles”. Consumer Theory - a model to describe how individuals behave. How do individuals choose what to consume? How do these decisions respond to changes in the environment? How can we use this model to describe market demand for goods? How should we start?

3 Budget Set How do you know what goods you can choose to consume at any one time?

4 Budget Set Suppose you are endowed with $10 and only goods you consume are peanuts and beer. Peanuts cost $0.10/oz (i.e. p p = 0.10) Beer costs $0.20/oz (i.e. p b = 0.20) How can we fully describe what combinations of peanuts and beer you can consume? Analytically? Graphically?

5 Budget Set Consumption Bundle – A list of numbers indicating how much of each good an individual is consuming: {q 1, q 2, …., q n } Budget Set – the set of consumption bundles of goods a person can afford to consume. Generally can be expressed by equation of form: p 1 q 1 + p 2 q 2 + … + p 3 q 3 ≤ m

6 Budget Set Ex: Suppose there are two goods, peanuts and beer. {50, 20} is a consumption bundle containing 50 oz. of peanuts and 20 oz of beer, {0,50} is a consumption bundle containing 0 oz. of peanuts and 50 oz of beer, {10,50} is a consumption bundle containing 10 oz. of peanuts and 50 oz of beer. If p p = 0.10, p b = 0.20, and m = 10, the budget set is 0.10q p q b ≤ 10 Is the bundle {50, 20} in your budget set? How about {0,50}? How about {10,50} ? What does it mean when the budget equation holds with inequality as opposed to equality?

7 Budget Set Interpreting prices As we will see, prices will play a big role in our analysis of consumer behavior. In our previous example, what was the price of beer? How do you interpret the slope of budget set? What if you lived in London, were endowed with 5 pounds, and Peanuts cost 0.5 pence/oz and Beer costs 0.10 pence/oz. What would your budget set look like? Are prices the same in London or different?

8 Graphing Budget Sets So slope of budget constraint is rise/run or simply negative of price ratio (-p 1 /p 2 ). Interpretation of slope: relative cost of good 1 in terms of good 2. q1q1 q2q2 m/p 2 m/p 1 p 1 /p 2

9 Graphing Budget Sets What happens when relative prices change? (original) m = 10, p p = 0.10 and p b = 0.20 m = 10, p p = 0.20, and p b = 0.20 m = 10, p p = 0.10 and p b = 0.10

10 Graphing Budget Sets What happens when endowment changes but relative prices don’t? (original) m = 10, p p = 0.10 and p b = 0.20 m = 20, p p = 0.10, and p b = 0.20 m = 4, p p = 0.10 and p b = 0.20

11 Budget Sets and Taxes Suppose m = $10, p p = 0.10, and p b = 0.20 How would budget set change if a 25% sales tax were imposed on beer? How about if a 25% sales tax were imposed on all goods? How about if a 25% tax were imposed on each person’s endowment?

12 Is two-good framework sufficient? With two goods, we could write a budget set as : p 1 q 1 + p 2 q 2 ≤ m Suppose we are interested in analyzing good 1, but there are two other goods that a consumer can also spend money on. Analyze good 1 compared to a composite good which is just the amount of money spent on all other goods (i.e. goods 2 and 3). Denoting “dollars” of composite good as q c we can write budget set as: 1. q c + p 1 q 1 ≤ m 2. p 2 q 2 + p 3 q 3 ≤ q c If we are only interested in analyzing good 1, we can ignore equation 2, and we are back in two-good framework. How would we draw this? What is slope?

13 More Complicated Budget Constraints Budget constraints seem pretty simple, why do we make them so complicated? Consider more complicated pricing schemes. Bulk Pricing Hamburger is $2/lb for first 3lbs, but only $1/lb for each additional amount past 3lbs.

14 More Complicated Budget Constraints Government policy can also often make budget constraints more complicated Food Stamps pre-1979 – qualifying poor households could get “50% off coupons” for up to $200 worth of food per month. post qualifying poor households given $100 in food vouchers. How do budget sets differ across two programs for a person earning $300/mo.?

15 More Complicated Budget Constraints Public housing Suppose a person is given a take-it-or-leave- it offer of a free apartment Further suppose this apartment would rent for $300/month in the marketplace. If person had $500/mo. in income, what would budget constraint look like? What if instead of this “in-kind” benefit, person was given $300 in cash. What would budget constraint look like? So why don’t we always give cash benefits?

16 Budget Constraints more broadly Suppose you work for Doctors without Borders. Your funds are enough to have twenty “beds” in your clinic. Each malaria patient you treat needs one week in your clinic for full treatment. Each tuberculosis patient you treat needs two weeks in your clinic for full treatment. What is monthly “budget constraint”? What is the “cost/price” of treating a tuberculosis patient?