ECON201 Lecture Notes - Lecture 2: Budget Constraint, Exogeny, Composite Good

• School: University of Waterloo
• Department: Economics
• Course: ECON201
• Professor: Ahmet Ozkardas

Document Summary

Econ 201 lec 002 budget constraint - jan 8, 2019. Consumer"s problem: choose the "best" bundle of goods that one "can afford" (x1, x2): a bundle of two goods: endogenous variable. Endogenous: value determined by model (p1, p2): prices: exogenous variable. Exogenous: value determined outside and imposed to the model m: consumer"s income: exogenous variable. 2-goods model: x1 - quantity of good 1; x2 - quantity of good 2 (units) observe: p1 - price of good 1; p2 - price of good 2; m - income ($) Realistic: if x1 -> ?, x2 -> composite good (includes everything other than x1) The budget constraint of the consumer can be written as p1x1 + p2x2 m (total expenditure total income) The budget constraint of the consumer requires that the amount of money spent on the two goods be no more than the total amount the consumer has to spend.