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AGEC 200 (18)
Lecture

2012.11.15.docx

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Department
Agricultural Economics
Course
AGEC 200
Professor
Anwar Naseem
Semester
Fall

Description
Budget and Utility - Substitute one good for the other, utility goes up. - But at one point give up so much and consume so much of the other one, total utility will go down o B/c not consuming good that you really lik - Implies that if you were to take budget line or budget constraint (certain amount of income), and you spend it all on one thing, can only eat that thing - Can consume everything on that line. If below, then not using all income. - Assumption is that there’s no saving involved and using all income - So max utility highest is where slope of utility function is 0 (where it turns) - At C, can have 2pounds of clams and 6 pounds of potatoes Hugh - Has to consume food and clothing. Same idea - Indifference curve: at all levels, you get same utility. Same amount of satisfaction on all points - Constant utility but what’s changing is the purchase of two goods that give you utility - Allows you to graph utility fxn (the indifference curve) - From f to d, diminishing clothes. B/c don’t want too much of one thing - He’s unwilling to give up extra unit of food for clothing - But along curve, utility/satisfaction is same But better way to represent utility fxn on graph - Problem with before is two variables on same axis - Better if utility curve represented where Y is potato and X axis is clams. - MU /x = xU /P . yveyy dollar you spend gives you the same extra utility. - MU /xU = Py/P = xaryinal rate of substitution - MU /xU is ylope of indifference curve. Slope is the marginal rate of substitution between x and y - Budget constraint: I = P X x P +Y y o Budget line simply downward sloped line. Slope is P /P x y - You will consume where Marginal rate of substitution is equal to slope of the budget line o Tangency of budget line and indifference curve - If budget increase, then consuming more of both goods. Travelling to higher indifference curve - If price of X goes down, indifference curve becomes flatter - If keep changing price of X, how does consumption of X change as P changes, gixen your indifference curve - Budget line pivots…so how does consumption change? - Price-consumption line = demand curve? o Determined by tangency of indifference curve and budget line. Keep doing that until can map out demand curve - Two effects: when price of good goes down… o 1. B/c of lower price, will consume more of that good and less of the other good - Substitution Effect: If price of gas goes down, what will it take for you to remain on same indifference curve o Is the
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