Economics 180

Lecture 1.1

http://econ.ucsb.edu/~pxshap/econ180/

CLASS WEBPAGE

Exam Dates

• January 14 Chapters 2

• February 11 Chapters 3-6

• March 9 Chapters 7-12

• March 17 Final Exam

Section IBackground Comparative

Advantage• One Country

– Indifference Curves

– Budget Constraints• Fixed Income and Prices• Initial Endowment and Fixed Prices• Initial Endowment -- Transformation

Notation

• Home (blank) Foreign (*)

• Two Products: Food and Clothing– Endowments eF e*F eC e*C

– Consumption xF x*F xC xC

Preferences

Utility FunctionsCobb Douglas – Homothetic

U = xCxF

1-

Indifference CurvesxF

xC

U0

U1

U2

Increasing Utility

Budget Constraints

Fixed Income and Prices

pFxF + pCxC = M xF =M/pF –(pC/pF)xC

M/pF

M/pC

xF

xC

-pC/pF

Budget Constraint

Initial Endowment and Fixed Prices

pFxF + pCxC = pFeF + pCeC

xF =eF/pF –(pC/pF)(xC – eC)

(pFeF+pCeC)/pF

(pFeF+pCeC)/pCeC

eF

xC

xF

-pC/pF

Budget Constraint

Initial Endowment and Transformation

Transformation: One unit of Food can be transformed into k units of Clothing

xC = eC – k(xF – eF) xF = eF – (1/k)(xC – eC)

eF+(1/k)eC

eC+keF

-1/k

Economics 180

Lecture 1.2

1

*

= 75 = 75

= F/C =