Lecture Notes for Sep 8, 2009

Please rate my notes after you read them! :) Budget Constraints and Choices The Budget Constraint Wants are unsatiable ? budget constraint exists because money and time are limited ? can be written as: Income= (Pricex)(# of Good X) + (Pricey)(# of Good Y) ? Slope= -(Pricex)/(Pricey) ? budget constraints are the combinations of possibilities available to exhaust an income on goods ? ex) $100/week to spend on food and clothes where food=$5/meal and clothes=$10/item ? first, plot the intercepts on the axes ? the equation of the line is C=10-1/2F because 100(The income)=5F(Price of food)+10C(Price of clothes) ? when graphing something vs. "everything else", plot the "something" on the x axis and "everything else" on the y axis ? budget constraints are straight lines because the prices of the goods are fixed ? changing income and keeping prices the same causes a parallel shift in or out (in if income decreases, out if income increases ? changing price changes one (or both) of the intercepts and changes the slope ? the portion of the graph enclosed by the budget constraint and axes is affordable, but a bad choice. it's a waste of resources because more can be had. ? the portion outside of the budget constraint is unaffordable and therefore not feasable. ? to be efficient with income, choose a point that lies on the budget set Budget Constraint Graph Budget constraints can analyze many things ? ex) Weekly hours of work ? wage=$20=slope ? up to eighty hours devoted to either leisure or labor ? equation of the line is Income=1600-20(80-hours worked per week).. or Income=1600-20(hours of leisure Weekly Hours of Work ? ex) Savings (with interest) vs. Spending ? slope= interest rate ? equation is Future consumption= Y intercept (if all $ is saved)-(interest)(current consumption) Important terms ? opportunity costs - the things that are given up in order to have or do other things ? diminishing marginal utility - when more consumption eventually equals less value ? ex) the pleasure gained from eating lots and lots of chocolate chip cookies declines after a point ? sunk costs - costs that occurred in the past and cannot be recovered