Chapter nine
Download
1 / 32

Chapter Nine - PowerPoint PPT Presentation


  • 146 Views
  • Uploaded on

Chapter Nine. Buying and Selling. Buying and Selling. Trade involves exchange, so when something is bought something else must be sold. What will be bought? What will be sold?. Buying and Selling. And how are incomes generated?

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter Nine' - jacob


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Chapter nine

Chapter Nine

Buying and Selling


Buying and selling
Buying and Selling

  • Trade involves exchange, so when something is bought something else must be sold.

  • What will be bought? What will be sold?


Buying and selling1
Buying and Selling

  • And how are incomes generated?

  • How does the value of income depend upon the prices of commodities?

  • How can we put all this together to explain better how price changes affect demands?


Endowments
Endowments

  • The list of resource units with which a consumer starts is called his endowment.

  • A consumer’s endowment will be denoted by the vector (omega).


Endowments1
Endowments

  • For examplemeans that the consumer is endowed with 10 units of good 1 and 2 units of good 2.

  • What is the endowment’s value?

  • For which consumption bundles may it be exchanged?


Endowments2
Endowments

  • Given prices p1=2 and p2=3 the value of the endowmentis

  • Q: For which consumption bundles may the endowment be exchanged?

  • A: For any bundle costing no more than the endowment’s market value.


Budget constraints revisited
Budget Constraints Revisited

  • So, given prices p1 and p2, the budget constraint for a consumer with an endowment is

  • The budget set is




Budget constraints revisited3
Budget Constraints Revisited

Notice that the endowment point isalways on the budget constraint.

x2

So relative price changes cause thebudget constraint to pivot about the endowment point.

w2

w1

x1


Budget constraints revisited4
Budget Constraints Revisited

  • The budget constraintcan be rewritten as

  • This says that the sum of the values of a consumer’s net demands is zero.


Net demands
Net Demands

  • Suppose and that p1=2, p2=3. Then the budget constraint is

  • Suppose the consumer demands (x1*,x2*) = (7,4), so the consumer exchanges 3 units of good 1 for 2 units of good 2. Net demands are x1*- w1 = 7-10 = -3, x2*- w2 = 4-2 = +2.


Net demands1
Net Demands

p1=2, p2=3, x1*-w1 = -3 and x2*-w2 = +2 so

The purchase of the 2 extra units of good 2 at $3 each is funded by giving up3 units of good 1 at $2 each.


Net demands2
Net Demands

x2

At prices (p1,p2) the consumersells units of good 1 to acquiremore units of good 2.

x2*

w2

x1*

w1

x1


Net demands3
Net Demands

x2

At prices (p1’,p2’) the consumersells units of good 2 to acquiremore of good 1.

w2

x2*

w1

x1*

x1


Net demands4
Net Demands

x2

At prices (p1”,p2”) the consumerconsumes her endowment; netdemands are all zero.

x2*=w2

x1*=w1

x1


Net demands5
Net Demands

x2

Price-offer curve contains all theutility-maximizing buy-sell grossdemands for which the endowment can be exchanged.

w2

w1

x1


Net demands6
Net Demands

x2

Price-offer curve

Sell good 1, buy good 2

w2

w1

x1


Net demands7
Net Demands

x2

Price-offer curve

Buy good 1, sell good 2

w2

w1

x1


Labor supply
Labor Supply

  • A worker is endowed with $m of nonlabor income and R hours of time which can be used for labor or leisure. w = (R,m).

  • The price of the consumption good is pc.

  • Let w denote the wage rate.

¾

¾


Labor supply1
Labor Supply

  • The worker’s budget constraint iswhere C, R denote the worker’s gross demands for the consumption good and for leisure. That is

¾

¾

{

{

expenditure

endowment value


Labor supply2
Labor Supply

¾

rearranges to

¾


Labor supply3
Labor Supply

¾

C

¾

slope = , the ‘real wage rate’

endowment

m

¾

R

R


Labor supply4
Labor Supply

¾

C

¾

C*

endowment

m

¾

R

R*

R

leisuredemanded

laborsupplied


Slutsky s equation revisited
Slutsky’s Equation Revisited

  • Slutsky explained that changes to demands caused by a price change can always be decomposed into

    • a pure substitution effect, and

    • an income effect.

  • This assumed that income y did not change as prices changed. But does change with price. What does this do to Slutsky’s equation?


Slutsky s equation revisited1
Slutsky’s Equation Revisited

  • A change in p1 or p2 changes so there will bean additional income effect, called the endowment income effect.

  • Slutsky’s decomposition will thus have three components

    • a pure substitution effect

    • an (ordinary) income effect, and

    • an endowment income effect.


Slutsky s equation revisited2
Slutsky’s Equation Revisited

x2

Initial prices are (p1’,p2’).

x2’

w2

w1

x1

x1’


Slutsky s equation revisited3
Slutsky’s Equation Revisited

x2

Initial prices are (p1’,p2’).Final prices are (p1”,p2”).

How is the change in demandfrom (x1’,x2’) to (x1”,x2”) explained?

x2’

w2

x2”

w1

x1

x1’

x1”


Slutsky s equation revisited4
Slutsky’s Equation Revisited

Þ

x2

Pure substitution effect

w2

w1

x1


Slutsky s equation revisited5
Slutsky’s Equation Revisited

Þ

x2

Pure substitution effect

Þ

Ordinary income effect

w2

w1

x1


Slutsky s equation revisited6
Slutsky’s Equation Revisited

Þ

x2

Pure substitution effect

Þ

Ordinary income effect

Þ

Endowment income effect

w2

w1

x1


Slutsky s equation revisited7
Slutsky’s Equation Revisited

Overall change in demand caused by achange in relative price is the sum of:

(i) a pure substitution effect

(ii) an ordinary income effect

(iii) an endowment income effect


ad