INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE INTERMEDIATE MICROECONOMIC THEORY MICROECONOMIC THEORY MICROECONOMIC THEORY MICROECONOMIC THEORY MICROECONOMIC THEORY MICROECONOMIC THEORY MICROECONOMIC THEORY MICROECONOMIC THEORY ECNM 611 Mr. Khumalo J. Mr. Khumalo J. Email: [email protected]Office hour: By appointment Office: Room number 131, 1st floor Contact: 082 590 2827 (9am-4pm)
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üConsumption bundle: (Xl, X2) -two numbers that tell us how much the consumer is choosing to consume of good 1 and how consume of good 1 and how much the consumer is choosing to consume of good 2.
Properties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget Set
üBudget line is the set of bundles that cost exactly m
üFrom make the subject of the formula
mxpxp =+ 2211 2xthe subject of the formula
üYou get
üWhere is the slope the BL
12
1
22 x
pp
pm
x −=
2
1
pp
−
Properties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget Set
üHow to draw the BL given P’s & m1.Calculate how much of good 2 will be bought if all m spent on good 2( ) m
x =good 2( ) 2.Calculate how much of good 1 will be bought if all income spent on goo1( )
22 p
mx =
11 p
mx =
Properties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget SetProperties of the Budget Set
üThe slope measures the rate at which the market is willing to substitute good 1 for good 2
üMeasures the opportunity cost of üMeasures the opportunity cost of good 1
Changes in the Budget LineChanges in the Budget LineChanges in the Budget LineChanges in the Budget LineChanges in the Budget LineChanges in the Budget LineChanges in the Budget LineChanges in the Budget Line
üIncreasing m makes parallel shift out.
üChange in income affects only the intercept & not the slope.intercept & not the slope.
üConsider fig 2.2 below
Changes in incomeChanges in incomeChanges in incomeChanges in incomeChanges in incomeChanges in incomeChanges in incomeChanges in income
Figure 2.2 Increasing income
Changes in incomeChanges in incomeChanges in incomeChanges in incomeChanges in incomeChanges in incomeChanges in incomeChanges in income
üDraw the figure/diagram that depicts a decline in income
üDRAW NOWüDRAW NOW
Changes in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in prices
üIncreasing PI makes budget line steeper. See Figure 2.3.
üIncreasing P2 makes budget line flatter. flatter.
üJust see how intercepts change.
Changes in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in prices
Figure 2.3 Increasing price
Changes in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in pricesChanges in prices
üMultiplying all prices by t is just like dividing income by t
üMultiplying all prices and income by t doesn't change budget line by t doesn't change budget line
Economic policy often uses tools that affect a consumer's BC.
üQuantity tax: the consumer has to pay a certain amount to the to pay a certain amount to the government for each unit of the good purchased (e.g. fuel tax)