ECO209Y5 Lecture Notes - Lecture 2: Budget Constraint, Real Wages, Normal Good
Document Summary
One period model is only static not dynamic decision making. Both choices together determine how much output is produced. We don"t care about why they are making choices or how they are over. Consider a representative consume whom values 2 goods: consumption and leisure. Consumption bundle is combo of c and l. U(c1,l2) > u(c2, l2) means they prefer bundle 1 to 2. U(c1,l2) = u(c2, l2) means they are indifferent. Consumption and leisure are normal goods (quantity desired rises with income rise) Rate of substitution is slope between a and b. Mrslc = rate at which consumer is just willing to sub leisure for consumption. Property 1: muc = u1 (c,l) = derivative of utility in terms of c du/dc and opposite for mul. Property 2: second derivative of u in c, second derivative of u in l < 0. Prices are relative (i. e. consumption units not dollars) We work in a real economy without money.
