Budget Constraints 2 Opp. cost of an extra unit of commodity 1 is p,/p2 units foregone of commodity 2 And +11 the opp. cost of an extra unit of commodity 2 is p2/p1 p2/ p,units foregone of commodity 1
Budget Constraints x2 x1 Opp. cost of an extra unit of commodity 1 is p1 /p2 units foregone of commodity 2. And the opp. cost of an extra unit of commodity 2 is p2 /p1 units foregone of commodity 1. -p2 /p1 +1
Budget Sets Constraints Income and Price Changes The budget constraint and budget set depend upon prices and income. What happens as prices or income change?
Budget Sets & Constraints; Income and Price Changes The budget constraint and budget set depend upon prices and income. What happens as prices or income change?
Higher income gives more choice New affordable consumption choices Original and new budget constraints are parallel(same Original slope) budget set
Higher income gives more choice Original budget set New affordable consumption choices x2 x1 Original and new budget constraints are parallel (same slope)
Budget Constraints-Income Changes No original choice is lost and new choices are added when income increases, so higher income cannot make a consumer worse off An income decrease may(typically will) make the consumer worse off
Budget Constraints - Income Changes No original choice is lost and new choices are added when income increases, so higher income cannot make a consumer worse off. An income decrease may (typically will) make the consumer worse off
Budget Constraints- Price Changes What happens if just one price decreases? Suppose p, decreases
Budget Constraints - Price Changes What happens if just one price decreases? Suppose p1 decreases