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Topic 1: Lecture 5

Topic 1: Lecture 5. Demand Analysis: Constraints We said that our understanding of Consumer Choice rests on the analysis of Preferences and Constraints. Let’s now turn to consider Constraints. Y. Y max. 0. X. X max. Topic 1: Lecture 5. Demand Analysis: Constraints

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Topic 1: Lecture 5

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  1. Topic 1: Lecture 5 Demand Analysis: Constraints We said that our understanding of Consumer Choice rests on the analysis of Preferences and Constraints. Let’s now turn to consider Constraints. Y Ymax 0 X Xmax Robin Naylor, Department of Economics, Warwick

  2. Topic 1: Lecture 5 Demand Analysis: Constraints We can represent a budget set and a budget frontier (or constraint) Y What equation can we give this constraint? Ymax 0 X Xmax Robin Naylor, Department of Economics, Warwick

  3. Topic 1: Lecture 5 Demand Analysis: Constraints The equation tells us that if we spend all our money income, M, on X and Y, our spending be equal to: Robin Naylor, Department of Economics, Warwick

  4. Topic 1: Lecture 5 Demand Analysis: Constraints Re-arranging, the equation for the budget constraint is: How do you interpret this equation? And Graphically? Robin Naylor, Department of Economics, Warwick

  5. Topic 1: Lecture 5 Demand Analysis: Constraints The equation of the budget constraint: Y Ymax 0 X Xmax Robin Naylor, Department of Economics, Warwick

  6. Topic 1: Lecture 5 Demand Analysis: Constraints Given the position of the budget constraint, what will be the consumer’s choice of X and Y? This will depend on their preferences: Y Ymax 0 X Xmax Robin Naylor, Department of Economics, Warwick

  7. Topic 1: Lecture 5 Demand Analysis: Constrained choice Given the position of the budget constraint, what will be the consumer’s choice of X and Y? This will depend on their preferences: IC3 Y IC1 IC2 Ymax 0 X Xmax Robin Naylor, Department of Economics, Warwick

  8. Topic 1: Lecture 5 Demand Analysis: Constrained choice Given the position of the budget constraint, what will be the consumer’s choice of X and Y? This will depend on their preferences: ICmax Y Ymax 0 X Xmax Robin Naylor, Department of Economics, Warwick

  9. Topic 1: Lecture 5 Demand Analysis: Constrained choice So, by bringing together preferences and constraints, we have a model which predicts/explains the consumer’s choices (demands) for X and Y . . . given . . .? Y Ymax a Y* 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  10. Topic 1: Lecture 5 Demand Analysis: Comparative Statics What will happen to the optimal choices of X and Y if there are changes to the parameters of the model? Y What are the ‘parameters’? Ymax a Y* 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  11. Topic 1: Lecture 5 Demand Analysis: Comparative Statics What will happen to the optimal choices of X and Y if there are relevant changes to the parameters of the model? Y Consider a change in money income. How do we show this? Ymax a Y* 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  12. Topic 1: Lecture 5 Demand Analysis: Change in money income Y Ymax a Y* 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  13. Topic 1: Lecture 5 Demand Analysis: Change in money income Y What can you say about the demand for X as M↑? And the demand for Y? Ymax â a Y* 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  14. Topic 1: Lecture 5 Demand Analysis: Change in money income Y What can you say about the demand for X as M↑? And the demand for Y? â Ymax a Y* 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  15. Topic 1: Lecture 5 Demand Analysis: Change in money income Y What can you say about the demand for X as M↑? And the demand for Y? â Ymax a Y* 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  16. Topic 1: Lecture 5 Demand Analysis: Change in money income Y What can you say about the demand for X as M↑? And the demand for Y? Ymax â a Y* 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  17. Topic 1: Lecture 5 Demand Analysis: Change in money income Y What can you say about the demand for X as M↑? And the demand for Y? Ymax a Y* â 0 X* X Xmax Robin Naylor, Department of Economics, Warwick

  18. Topic 1: Lecture 5 Now read B&B 4th Ed., pp. 103-138 (but don’t worry about issues which go beyond what you have seen in lecture notes or seminar exercise sheets) Robin Naylor, Department of Economics, Warwick

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