ECON 110 Lecture Notes - Lecture 2: Budget Constraint, Consumer Behaviour, Opportunity Cost

• School: Queen's University
• Department: Economics
• Course: ECON 110
• Professor: Ian James Cromb

Document Summary

The household considers its income net of savings as given and allocates it to consumption goods and services in order to maximize its satisfaction. Two major components in this decision process: household"s income constraint; and. 2. its individual preferences over the available goods and services. Income constraint yields what the household can do whereas preferences what the household wishes to do. Household income (m) derives from various sources, from work to investments to gov"t support. Goods and services consumed are numerous but, for our purposes, two will suffice for an intuitive understanding of household choice problem. Thus the budget constraint can be written as pxx + pyy m or pxx + pyy = m if household spends all income. Note that (px,py) are the market prices for (x,y). The household budget equation pxx + pyy = m can be rewritten as y = (m/py) (px/py)x where m/py is the vertical intercept of the budget line and px/py is its slope.