Consumer Behaviour

Building Blocks

Consumption Possibility Set - X

(you cannot buy a mercedes but you can think of it, so it comes under possibility)

$$ x = \{x_1,...,x_n\} \hspace{1cm} x \in X $$

$X$ cannot be empty.

• Non-negative orthant

  $$ x_i \ge \forall i $$

• Convexity

  • Additivity

  $$ x \in X, y \in X \rightarrow x+y \in X $$

  • Divisibility

  $$ x \in X \rightarrow \alpha \in [0,1] $$

Consumption Feasibility

1. Legal Constraint
2. Geographical Constraint
3. Financial Constraint

Budget Set and Budget Line

Budget Set

$$ P_1 x_1 + P_2 x_2 \le I $$

Budget Line

All combinations of goods for which the total amount of money spent is equal to income.

$$ P_1 x_1 + P_2 x_2 = I $$

Effects of Changes in Income and Prices