Gruber4e ch02
Gruber4e ch02
Gruber4e ch02
CopyrightGruber
2012 Fourth
WorthEdition
Publishers
Copyright 2012 Worth Publishers
1 of 46
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
2 of 46
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
3 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
4 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
5 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
6 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
7 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
8 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
9 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Marginal Utility
How
10 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
11 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
12 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
13 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Budget Constraints
Budget constraint: A mathematical
representation of all the combinations of
goods an individual can afford to buy if she
spends her entire income.
Opportunity cost: The cost of any
purchase is the next best alternative use of
that money, or the forgone opportunity.
Quick hint: When a persons budget is
fixed, if he buys one thing he is, by
definition, reducing the money he has to
spend on other things. Indirectly, this
purchase has the same effect as a direct
good-for-good trade.
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
14 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Budget Constraints
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
15 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
16 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
17 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
18 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
19 of 46
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
2.1
Quantity
of CDs,
QC
6
B
4.2
4
3
A
C
IC1
3 4.24
BC2
Incom Substitut
e
ion effect
effect
IC2
BCg
BC1
12
Quantity
of Movies,
QM
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
20 of 46
2.1
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
21 of 46
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
2.2
10,000
A
Sl
op
1 e =
0
B
Slo
p
5 e =
E
6,00
5,000
0
3,00
0
D
F
C
1,000
1,40
0
2,000
Leisure
(hours)
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
22 of 46
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
2.2
(1,655 hours,
$4,725)
(1,910 hours,
$5,450)
10,000
6,00
5,000
0
3,00
0
1,000
1,40
0
2,000
Leisure
(hours)
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
23 of 46
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
2.2
(2,000 hours,
$5,000)
(2,000
hours,
$3,000)
10,000
6,00
5,000
0
3,00
0
B
1,000
1,40
0
2,000
Leisure
(hours)
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
24 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
25 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Demand Curves
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
26 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Demand Curves
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
27 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Elasticity of Demand
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
28 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Elasticity of Demand
Elasticities of demand:
Elasticities of demand are often negative:
Quantity demanded falls as price rises.
Elasticities of demand are typically not
constant along a demand curve.
Typically, a change in the price of one good
will affect demand for other goods as well.
The effect of one goods prices on the
demand for another good is the cross-price
elasticity.
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
29 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Elasticity of Demand
Perfectly inelastic and perfectly elastic
demand:
When the elasticity of demand is zero, the
demand curve is perfectly inelastic, in
which case
o the demand curve is vertical, and
quantity demand does not change when
price rises.
When the elasticity of demand is infinite,
the demand curve is perfectly elastic, in
which case
o the demand curve is horizontal, and
quantity demanded changes infinitely for
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
30 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Supply Curves
How
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
31 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Profit maximization
How
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
32 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
33 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Social Efficiency
34 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
35 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
36 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
37 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
38 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
39 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
40 of 46
2.3
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
41 of 46
2.4
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
42 of 46
2.4
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers
43 of 46
2.5
C H AP T E R 2 T H E O R E T I C AL T O O LS O F P U B LI C F I N AN C E
Conclusions
44 of 46