Lecture Microeconomics (5th edition): Chapter 4 - Consumer choice. This chapter presents the following content: The budget constraint, consumer choice, duality, some applications, revealed preference. | 1 Consumer Choice Chapter 4 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Four Overview 1. The Budget Constraint 2. Consumer Choice 3. Duality 4. Some Applications 5. Revealed Preference Chapter Four Copyright (c)2014 John Wiley & Sons, Inc. 3 Budget Set: The set of baskets that are affordable Budget Constraint: The set of baskets that the consumer may purchase given the limits of the available income. Budget Line: The set of baskets that one can purchase when spending all available income. Chapter Four Key Definitions Copyright (c)2014 John Wiley & Sons, Inc. 4 Price of x: Px ; Price of y: Py Income: I Total expenditure on basket (X,Y): PxX + PyY Assume only two goods available: X and Y The Basket is Affordable if total expenditure does not exceed total Income: PXX + PYY ≤ I Chapter Four The Budget Constraint Copyright (c)2014 John Wiley & Sons, Inc. 5 Two goods available: X and Y I = $10 Px = $1 Py = $2 All income spent on X → I/Px units of X bought All income spent on Y → . | 1 Consumer Choice Chapter 4 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Four Overview 1. The Budget Constraint 2. Consumer Choice 3. Duality 4. Some Applications 5. Revealed Preference Chapter Four Copyright (c)2014 John Wiley & Sons, Inc. 3 Budget Set: The set of baskets that are affordable Budget Constraint: The set of baskets that the consumer may purchase given the limits of the available income. Budget Line: The set of baskets that one can purchase when spending all available income. Chapter Four Key Definitions Copyright (c)2014 John Wiley & Sons, Inc. 4 Price of x: Px ; Price of y: Py Income: I Total expenditure on basket (X,Y): PxX + PyY Assume only two goods available: X and Y The Basket is Affordable if total expenditure does not exceed total Income: PXX + PYY ≤ I Chapter Four The Budget Constraint Copyright (c)2014 John Wiley & Sons, Inc. 5 Two goods available: X and Y I = $10 Px = $1 Py = $2 All income spent on X → I/Px units of X bought All income spent on Y → I/Py units of X bought Chapter Four A Budget Constraint Example Budget Line 1: 1X + 2Y = 10 Or Y = 5 – X/2 Slope of Budget Line = -Px/Py = -1/2 Copyright (c)2014 John Wiley & Sons, Inc. 6 I/PX = 10 Y X • • A C B • I/PY= 5 Budget line = BL1 -PX/PY = -1/2 Chapter Four A Budget Constraint Example Copyright (c)2014 John Wiley & Sons, Inc. 7 Chapter Four Budget Constraint Location of budget line shows what the income level is. Increase in Income will shift the budget line to the right. More of each product becomes affordable Decrease in Income will shift the budget line to the left. less of each product becomes affordable Copyright (c)2014 John Wiley & Sons, Inc. 8 Y X 10 5 BL1 6 12 BL2 I = $12 PX = $1 PY = $2 Y = 6 - X/2 . BL2 If income rises, the budget line shifts parallel to the right (shifts out) If income falls, the budget line shifts parallel to the left (shifts in) Shift of a budget line Chapter Four A Budget Constraint Example Copyright (c)2014 John Wiley & Sons, Inc. 9 Chapter .
