Final Program EXPRES 2012 - Conferences

In the two-dimensional model of consumers’ choice limitsor the so-called budget consumption limitation areexpressed by the so-called line or consumption limit. Incase that the variables of money income of traders A andB are equal in exchange, i.e. IA = IB, and prices ofproperties X and Y which come in exchange betweenthem Px and Py, the budget limitation of consumption forboth exchangers can be expressed by the relation:IA, B= X⋅P+ Y⋅P X Ywhence(1)X =Y =IPXIPYP−PXXP−PXY⋅ Y⋅ XUnder the above supposition, the identical budget linecan present the limits of consumers’ choice for traders Aand B. With unchanged prices of goods and amount ofmoney income, the position of budget line remainsunchanged, and its slope expresses the relation of propertyprices, i.e. Px and Py. Look now at Figure 3, thepossibilities of general equilibrium in exchange, takinginto consideration the amount of money income and pricesof exchanged goodsFigure 3.In Figure 3, general exchange equilibrium between Aand B is at point E on the Egdeworth contract curve. Atthis point, namely, we have matching up the slopes ofindifference curves of trader A, on the curve Ae and theslope of indifference curve B, the other trader inexchange. In this point (as in all other points of thecontract curve), we have matching up of marginalsubstitution rates of X and Y for traders A and B.However, contrary to other points on the contract curve, inE, the slope of their marginal substitution slope, i. e. MRS(it is in fact the slope of tangent in some point) ismatching up with the slope of their budget line. The slopeof budget line expresses relative prices, in other words, therelation of prices of goods in exchange, i.e. X and Y. Atthe equilibrium point E, the following equalities are valid:PXMUXMRS A(X,Y) = MRSB(X,Y)= =PYMUY(4)(MU – Marginal Utility)At point E, equilibrium goods prices have the samemutual relations in marginal rate of goods substitution, i.e.MRS is equal for both traders in exchange, and at the(2)(3)same time, it is appropriate to relations of marginal utilityof exchanged goods. It means that the equilibrium point Eis suitable for relation of the proportion where supply anddemand of exchanged goods become equal.YI/P xA 1I/P y A 2 A3 BE 1b2I/P y1E b3B 2E a3PCC AI/P y2B 3O AEa1E a2XE b1I/P x1I/P x2I/P x3 XFigure 4.By the combination of indifference curves and budgetlines we obtain the so-called PCC (Price ConsumptionCurve), which show the structure of optimal consumerbaskets in case of price changes of some goods (supposingthat prices of other goods, the level of money incomes ofconsumers and their preference system are steady). InFigure 4, we presented the curves of relations of pricesand consumption for individuals A and B, supposing thatthe product price X changes for trader A; for trader B, theproduct price Y is changeable. All other relations andconditions remain unchangeable.The curve of relations of price and consumption oftrader A, i.e. curve PCCA shows that, starting from thecombination of goods in point Ea1, which is located alongwith the starting position of budget line, the trader A isready to offer increasing quantity of product X forincreasing less quantity of product Y. It is done bygradually price reduction of product X presented bybudget lines I/Px2 and I/Px3. This trader tries to optimizehis consumer utility in the conditions of changed prices.Contrary to trader A, in northeast angle of Diagram,considering PCCB, i.e. the curve of relations of price andconsumptions of trader B, we see that the latter trader isready to exchange more product Y whose price reducesfor increasingly less quantity of product X, in view ofmaximization of his consumer utility.In fact, the curve of relations of prices and consumption ofthe trader A, i. e. PCCA, represents the curve of offer A,i.e. its readiness to change goods X for Y in exchange. Onthe other side PCCB, i.e. the curve of relations of pricesand consumption of trader B, presents the curve of offerB, i.e. acceptable relation of goods exchange X and Y forIndividual B, depending on price change of product Y.Traders of exchange A and B along their offer curves,starting from points Ea1 and Eb1 to points Ea3 and Eb3get to indifference curves which become more distantfrom the origos, i.e. which express an increasing level ofutility for them.Present, finally, in Figure 5, the curve of relations ofprices and consumption of both traders, i.e. PCCA andPCCB, inside of the so-called “region of mutualadvantages”, limited by their starting indifference curvesAe and Be.PCC BYO BI/P y3116