Household Behavior Constrained Choice Income cid 127 Wealth Accumulated total Existing Prices Basic Household Decisions How much to demand Spending How much labor to supply Now vs Later allocation Some Terminology Budget Constraint Px X Py Y Income cid 127 Where Px Price of commodity x X Quantity of x Py Price of commodity y Y Quantity of y cid 127 What if price of drafts drops to 1 cid 127 Graph pivots out new graph cid 127 What if pizza got more expensive Limits imposed by income wealth and existing prices Example Pizza slice costs 3 each Drafts are 1 50 Your budget is 30 Real purchasing power will diminish i e less pizza cid 127 Opportunity Set Set of options defined and limited by budget constraint Underneath and on the line of consumption possibilities Set of opportunities to purchase real goods and services The satisfaction that a good service generates Real Income Utility An experiment Donuts cid 127 Marginal Utility Additional satisfaction gained by consuming one additional unit Law of Diminishing Marginal Utility Diamond Water Paradox Smith Diamonds Labor high price not very useful cid 127 Water Not much labor low price useful the additional satisfaction gained from consuming one additional unit declines as more and more of that item is consumer Concludes a labor base approach makes more sense for determining value than a utility base approach BUT we need to focus on marginal utility you would rather have more diamond than 1 water 1 MORE DIAMOND USEFUL In Microeconomics All rational decisions focus on the margin cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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