ECON 100A Lecture Notes - Lecture 3: Opportunity Cost, Budget Constraint, Purchasing Power Parity
Document Summary
Physical world is the source of most of our constraints. Time: affects amount of income we can gain. Purchasing power is determined by market prices. Analyzes cost-of-living comparisons by comparing prices of the same good in different places. Budget constraint: a line connecting all affordable consumption bundles, that exhaust all income, for a given level of income and prices. Income and price are exogenous (pre-determined outside of model, not affected by changes within model) Consumption is endogenous (originates within model, changes when other variables change) Model consumption of two goods important assumption of the constrained maximization model is that consumers spend all their income. The solution to the constrained maximization problem will provide the level of qx and qy consumed, given preferences, income and prices. mathematical equation of the budget constraint is a straight line. Rearrange above equation to get qy = (i - pxqx)/py. Y-axis intercept of i/py and a slope of -px/py.
