What is an endowment (w1,w2)(w1,w2)?
The initial bundle of goods a consumer owns before any trade occurs.
What is Gross Demand (x1,x2)(x1,x2)?
The total amount of a good that a consumer ends up consuming.
What is Net Demand?
The difference between what a consumer ends up with and their initial endowment: (x1−w1,x2−w2)(x1−w1,x2−w2).
If net demand for a good is positive, what does that mean?
The consumer is a net buyer of that good (they consume more than they started with).
If net demand for a good is negative, what does that mean?
The consumer is a net seller of that good (they end up consuming less than they started with).
What is the new form of the budget constraint with an endowment?
p1x1+p2x2=p1w1+p2w2p1x1+p2x2=p1w1+p2w2. The value of consumption must equal the value of the initial endowment.
Why is the endowment point always on the budget line?
Because the consumer can always choose not to trade, consuming exactly their initial bundle (w1,w2)(w1,w2).
How does the budget line rotate when a price changes?
It pivots around the endowment point, as this point remains affordable regardless of price changes.
What is the Total Change in Demand composed of when the consumer has an endowment?
Total Effect = Substitution Effect + Ordinary Income Effect + Endowment Income Effect.
How does the Endowment Income Effect differ from the Ordinary Income Effect?
The Ordinary Income Effect comes from a change in purchasing power with fixed money income. The Endowment Income Effect comes from the change in the value of the initial endowment bundle when prices change.
If the price of a good you are a net seller of increases, how does the Endowment Income Effect influence your demand?
It is positive. The price increase makes you richer (your endowment is more valuable), so you will demand more of both goods (assuming they are normal).
If the price of a good you are a net buyer of increases, how does the Endowment Income Effect influence your demand?
It is negative. The price increase makes you poorer (the good you need to buy is more expensive), so you will demand less of both goods (assuming they are normal).
What is the core idea behind the Slutsky Equation with Endowment?
A price change affects you in two ways: 1) It changes the relative cost of goods (Substitution Effect), and 2) It changes the value of your initial wealth (Endowment Income Effect).
In the labor supply model, what is the consumer’s initial endowment?
The total time available (R)(R), which can be allocated to either Leisure (R)(R) or Labor (L)(L), so that R+L=R‾R+L=R.
What is the budget constraint in the labor supply model?
pcC=m+wLpcC=m+wL, where consumption spending is funded by non-labor income mm and labor income earned at wage ww.
How can the labor supply budget constraint be rewritten in terms of leisure RR?
pcC+wR=m+wR‾pcC+wR=m+wR. The “full income” on the right is the value of all time spent as leisure plus non-labor income.
What is the price of leisure?
The wage rate ww. Choosing an hour of leisure means forgoing one hour’s worth of wages.
What does Leisure Demanded refer to?
The amount of time RR the consumer chooses to take as leisure.
What does Labor Supplied refer to?
The amount of time L=R‾−RL=R−R the consumer chooses to work.
How can an increase in the wage rate ww lead to a decrease in labor supply?
Through a strong income effect: the higher wage makes the consumer feel richer, leading them to “buy” more leisure (work less), which can overpower the substitution effect to work more.
What does it mean that “overall consumption doesn’t change because you just gave up to gain”?
This refers to the idea of a pure substitution effect along an indifference curve, where utility is held constant and consumption is reallocated by “giving up” one good to “gain” another.
What is the “value of the endowment point”?
It is the market value of the consumer’s initial assets: p1w1+p2w2p1w1+p2w2. This value determines their potential consumption possibilities.
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Lesson 221
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Lesson 333
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Lesson 418
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Lesson 525
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Lesson 622
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Lesson 719
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Lesson 814
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Lesson 915
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Formulas18
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Market Equilibrium27
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Technology26
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Profit Maximization28
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Cost Minimization64
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Cost Curves17
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Firm supply24
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Industry Supply26
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General Equilibrium51
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Monopoly and Monopsony42
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Oligopoly32
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Externalities5
