Principles of Economics

Principles of Economics
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Contents
Section A – Microeconomics...........................................................................................................3
A1. Budget constraint.............................................................................................................3
Section B – Microeconomics...........................................................................................................6
Question B1............................................................................................................................6
Section C – Macroeconomics........................................................................................................11
C1 Real Exchange Rate (RER).............................................................................................11
Section D – Macroeconomics........................................................................................................12
Question D3..........................................................................................................................12
References......................................................................................................................................16
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Section A – Microeconomics
A1. Budget constraint
Budget constraint is term used in economics to describe all of different combinations of
products and services which a buyer may buy considering current costs and his/her income. To
evaluate consumer preferences, consumer philosophy employs the principles of budget limit as
well as preference map. In two-good example, all definitions have a ready-to-use graphical
representation (Ogunjuyigbe, Ayodele and Akinola, 2017). Customer is limited by budget so
they could only buy as much as income allows. The equation of a budget constraint is
P{x}x+P{y}y = m, where P_x is price of good X, as well as P_y is price of product Y, as well as
m = income. In this regard following are certain key uses of budget constraints:
Individual choice
Consumer behavior is a matter of maximization. It entails maximizing our utility by making the
best of our scarce resources. The only factor that restricts consumption is own budget, because
customers are irresistible and utility functionality rise with quantities. In common, the budget
collection (all package options on or under budget line) reflects all potential packages of
products that a person can afford based on their incomes and product costs. When acting
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rationally, a buyer should opt to buy products at the level on preference map where most
preferred accessible indifference curve becomes tangent to budget constraint. Tangent point (xy
coordinate) reflects the number of products x as well as y that a buyer can buy to get most out
of budget. It's worth noting that the best consumption package isn't necessarily an interior option.
When optimality condition's response corresponds to an unfeasible package, the consumer's best
option would be corner solution, implying that the products or inputs perfect replacements. The
expansion direction is line that connects all levels of tangency between indifference curve as well
as budget constraint.
The formula is extended to include two-dimensional budget constraints:
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