Chapter 3 The Behavior of Consumers - WSC

Document Sample
Chapter 3 The Behavior of Consumers - WSC Powered By Docstoc
					 The budget constraint

Consumers need income to buy
goods and they must pay prices.
 These features limit what the
     consumer can have.

                                  1
                         Budget constraint or budget line

 The budget constraint for an individual
  shows combinations of x and y that can be
  attained given a certain income and assuming
  prices must be paid for the goods.
 The constraint will be a line in a graph where
  the amount of x is measured horizontally and
  the amount of y is measured vertically.




                                                            2
                                 Budget constraint or budget line
If I = the consumer income in dollars
  Px = the price per unit of x
  Py = the price per unit of y
  x = the amount of x the consumer buys
  y = the amount of y the consumer buys,
then the amount the consumer buys is

I = (Px)(x) + (Py)(y)   or y = (I)/(Py) - [Px/Py](x)

Note if x = 0, y = I/Py and if

y = 0, x = I/Px and the slope of the line is - (Px)/(Py).


                                                                    3
                                     Budget constraint


     y


(0, I/PY)   -Px/Py This is the slope – a negative
                                         number.


                          x
              (I/Px, 0)




                                                         4
                                           Budget constraint
                               The slope of the budget
   y                           line is - Px/Py. Say x = a
                               bag of chips and y = a can
                               of pop. If Px = $1/bag and
                               Py = .50/can, then
          2                            - Px/Py = -($1/bag)
                                                  ($.50/can)
               1                         = - 2 cans/bag
                              x
The slope of the budget line indicates that if one bag of
chips is given up, 2 cans of pop can be obtained in the
market. This occurs at every point on the budget line
when prices remain constant in relation to the amount
bought.
                                                               5
                                                      slope
Note on the previous screen that the slope of the budget line
is telling us about how much good x is valued in the market in
relation to good y.
This implies that the slope of the budget is indicating the
market rate of substitution of good x for good y.
The slope of the budget is the relative price of x.




                                                                 6
                                                    Example
 Say a consumer has $20 bucks to spend and good x costs $5 per unit
 and good y costs $4 per unit.
 The graph of the budget line would be
    y

(0, 5)                    The slope is -5/4 = -
                          1.25. This means that
                          if 1 x is given up 1.25
                          y can be obtained.
                             x
                 (4, 0)

                                                                      7
                                                       NOTE
Sometimes a question in the book will have something about
showing me a graph. Instead of having you draw the graph
electronically you can just tell me about both intercepts and the
slope of the line. That way you do not have to draw the graph.

Of course if you are in a face to face class you can turn in graphs.




                                                                       8

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:7
posted:1/23/2013
language:Unknown
pages:8