Introduction And Consumer Theory Flashcards
Budget constraint
Identifies what consumers can afford to buy
Consumer theory - what is it about?
Understanding how changes in budget constraint influence consumption
What is the “Standard consumer problem”
Bundle (x,y) can only be purchased if
PxX + PyY <= M
I.e income (M) has to be greater than bundle price.
How can we find equation for budget constraint
What is slope and intercept?
Rearrange the bundle (previous slide) making y subject
Y= m/Py - PxX/Py
M/Py = y intercept
-Px/Py = slope
What does the slope of the budget line represent, and formula?
- How can we math it? (Pg16) or just remember final equation.
Opportunity cost - the benefit lost from the next best alternative. (Give up good y to have more of good X)
- Creates new equation with Δ , then uses simultaneous equations. Or just remember final equation Δy/Δx = -Px/Py
Factors influencing budget constraint’s intercept and slope. (1 for each)
Changes in income - SHIFT BY INTERCEPT (As impacts M in M/Py)
Changes in price - Changes slope as -Px/Py
2 types of taxes
VALUE ADDED TAX (AD VALOREM)
QUANTITY TAX
Value added tax equation
(1+t)P
P is price of good
T is tax
Quantity tax equation.
P+t
Price paid by buyers (Pd)
Pd = Ps + t
I.e buyers pay a higher price than sellers receive because of the tax
Pd is price paid by buyers
Ps is price paid by sellers
2 types of subsidies
Value subsidy - gov gives back a % of purchased good or service
Quantity subsidy - per purchased unit
Value subsidy
(1-σ)p
Quantity subsidy equation
P-s
Price paid by buyers in a subsidy (Pd)
Pd=Ps - subsidy
Buyers (Pd) pay a lower price than sellers receive
Price paid by sellers Ps
Lump-sum tax
Government takes away a fixed amount regardless of consumers behaviour.
What will this do to the budget line on the graph
Budget line shifts inward as fall in income (M)
What is rationing?
Learn the budget constraint graph with rationing (of good X in this case) pg 28
When maximum level of consumption is fixed for a good.
In the graph, green shaded area represents budget set, goes up to Xbar (the max ration)
What if we combine taxes, subsidies and rationing?
Learn graph taxing consumption above a certain quantity (of good X in this case) pg 29
Good x can be consumed at price p below quantity Xbar (max ration) and a tax can be introduced so cost is now (p+t) for any additional unit above the ration.
Graph when it reaches Xbar (max ration), slope gets steeper, since a tax is charged on units above Xbar. (Slope becomes -(px+t)/py
Budget set vs budget line
Budget set shows all possible combinations that can be purchased with the given budget. (Area under budget line)
Budget line shows all possible combinations that can be purchased using ALL of the revenue. (Along the line)
