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Lecture

# Topic 3 - Budget Constraints

Department
Economics
Course Code
ECO206Y1
Professor
Loren Brandt

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Topic 3 - Budget Constraints
(Lecture 2 Sept 21st)
๏ฌ Intuition:
1. Goods: x1, x2;
2. Price: p1, p2
3. E: total expenditure/budget the individual has;
Assume that all of E is spent, E = p1x1 + p2x2 ๏  ๎ ๎ซ ๎ต๎ณ
๎๎ซ๎ต๎๎ซ
๎๎ซ๎ ๎ซ
Y-intercepts: ๎ณ
๎๎ซ = maximum units of x2 that can be consumed;
Slope: ๎ต๎๎ซ
๎๎ซ = OC = Units of x2 that have to be reduced to consume one more unit of x1;
-- Change in Variables:
x2 x2 x2
x1 x1 x1
E๎ shifts outward p1๎ steeper p2๎ flatter
-- Non-linear Constraint budget x2
Liner budget constraint = assumption that prices are fixed;
In the real world, there might be non-linearity of prices
e.g. price of electricity depends on usage
x1<a, p1;
x1>a,2p1;
x2,p2 a x1
๏ฌ Inter- temporal Budget Constraint
Assume Y1,Y2 โincomeโ in two periods;
x1p1 + x2p2 = Y1+Y2 ๏  x1 = ๎๎ซ๎ฌพ๎๎ซ
๎๎ซ ๎ต๏บ๎ ๎ซ๎๎ซ๏ป
๎๎ซ