3. Budget Constraints and Constrained Choice

MIT 14.01 Principles of Microeconomics, Fall 2018
Instructor: Prof. Jonathan Gruber
View the complete course: ocw.mit.edu/14-01F18
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This lecture continues the discussion about consumer choice and what happens when budget constraints are introduced.
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[@yeahwhat6363]

If I don't have budget constraints I would attend MIT after high school.

[@yeahwhat6363]

@@arrowmouse this ratio seems low, here in India top stem universities (IITs) have 2,000,000 + aspirants and only 10k get in 😂

[@actualideas8078]

Their faculty vacations on Epstein’s island. I would never give them my money

[@hainamtran2232]

@@yeahwhat6363 The quality of the Applicants are not the same lol

[@gouravtada]

@@hainamtran2232 well said

[@yusufyakub9068]

You’re correct

[@gilgamarsh]

Jonathan Gruber is such an incredible instructor, he and MIT should be immensely proud of these lectures.

[@SakshiSingh-xq1ze]

Can u recommend this type of lec for macroeconomics? Pls

[@bazingapuzza]

​@@SakshiSingh-xq1ze there is one on KZbin from another big American school.

[@tarafahey6217]

00:00 Setting Up Budget Constraints 05:25 - - > Marginal Rate of Transformation 07:16 - - > Weight Watchers Example 12:16 Opportunity Set 19:15 Tangency 22:10 The Maths 31:00 Food Stamps Example 38:39 - - > Imposing Preferences 44:13 - - > Effective? (vs money injection)

[@THEPBFELIPE]

Thank you so much :) Very nice of you!

[@alita181]

Thank you so so much for publishing this. I'm an adult student finishing my degree with an online university and I cannot, for the love of God, understand a single word of the crappy tutorials that my university provides. These videos not only make everything a lot easier to understand but it also makes it so much fun and engaging. Thank you MIT and thank you Professor Gruber.

[@dr.cranium9080]

what uni did you choose?

[@esosesos9743]

Thanks also to the video editors for showing all the diagrams.

[@mauriciobemfica]

Mr. Gruber makes microecon Waaayyyyyyyyy more interesting than my classes in my Masters!!! Thanks MIT!!!!

[@NazriB]

Lies again? Bet Clic Acura

[@SakshiSingh-xq1ze]

Can u recommend any macroeconomics lecture series?

[@crisronaldo8365]

​@@SakshiSingh-xq1ze Principle of macroeconomics by Missouri State University

[@suindude8149]

Really in case of the previous lectures also so inculcating that generates so many models in my mind solving the crude level industrial problems.

[@nycbankers1427]

I told my mom I was attending MIT she was so happy but little does she know my budget constraint only allows me to go to KZbin University

[@ShyamSunder-se3tq]

let's assume that your parents have given you some amount of income, we'll call it "WHY"

[@thequickreviewer7956]

Absolutely love the way he explain things with ease and also with great examples with which you can relate.

[@sebastianlastname1986]

This is going hand-in-hand with my online microeconomics class. Thank you so much for posting these lectures, I wish I took this class in person, but this makes up for it!

[@RaylinRecords]

Where are the black and red dots for the opportunity set?

[@isabelledesouzaafonso2-a161]

im looking for them too

[@debunklies9124]

A good idea would be to download the transcript, play the video at 1.75 speed and look at the transcript and the graphs (could been found in the handouts section). If you don't get something you could play the video at lower speed.

[@hongyo122]

Given my buget, 최상의 선택을 하는 것(=further indifferent curve)= tangency 를 구하면 됨, 그 bundle=optimal choice(AC)

[@louisechristiansen3877]

Thank you so much for this excellent free education.

[@mohdluqman1336]

Are you on Facebook

[@jayangli]

Same. Really like these free lectures from MIT. Thankyou. They don't grant certification on MITopencourseware, but the free learning for anyone that wants to and get education from MIT is just fantastic.

[@muchbuild]

I am not even economics students yet videos are bingeable it's really good

[@hannahurmoneit2218]

Professor Gruber is single handily saving my economics exam!!

[@lebeccthecomputer6158]

This guy is an awesome professor

[@brainstormingsharing1309]

Absolutely well done and definitely keep it up!!! 👍👍👍👍👍

[@h.i.sjoevall4213]

Thank you for publishing these!

[@sauravsatyadarshiray]

Bingeing on Prof. Gruber's lectures.

[@elkyelkyelky]

Finished, thanks for sharing

[@WorthlessWinner]

40:00 i was getting really mad at Jon saying he was just doing positive economics when the choice of "shelter" as good B rather than "drugs" has obvious normative implications..... so i'm glad he addresses this, i should've had more faith in him :)

[@AsadAliShah89]

I hadn't budget, so I am attending MIT on youtube after graduation in my private Master degree programme

[@anshuaditya5665]

This lectures are so good it's feel it's made by some mit instructor

[@zardi9083]

How to shut a student up: "That is a really good question and we will come back to that later"

[@obaadelusi]

Thank you for this.

[@arielsong1289]

One point I wanna make to the "food/shelter" case, if most people living below the poverty line do prefer shelter, it is better to not give them cash but other life essentials. Because if everybody spend more money on shelter, they would just drive up the low-end housing price. Because they are the target group of that market anyways, so if all of them are capable of/willing to pay more money, the competition'd make price goes up and money goes to the landlords.

[@arubhardwaj4733]

I already passed my UG: why I am watching this? It's an addiction, lol

[@anudarib]

Yo I am addicted to isekai mangas and webtoons and been using all my concentration skill to focus on this class Yours is good addiction

[@Charismatic8482]

This just made life in college a whole lot easier.

[@Manuel-vz3cu]

Thank you MIT

[@shivakumarv301]

Can a person compare more than two variable at a time? Is his focus of attention not limited to two things? What's the point of creating three dimensional plane that represents some models of economics?

[@gnc9400]

In lesson 2 professor Gruber mentioned addictive behaviour, like smoking, can change your utility function over time. So I think an idealized perfectly rational agent should take this into account, but in practice doesn't look so simple. In these cases, are economists more amenable to some form of paternalism?

[@pickyraccoon]

Look for Richard Thaler and Cass Sustein. They coined the term "libertarian paternalism" and it's well used in behavioral economics as a whole. 😊

[@suindude8149]

In case of the optimization of life's own temporal value,the most optimistic way in the risk dissoluted scenario of the macroeconomic behaviour,it's really the inverse utility of paternalism if we don't accept the indifference to the smoking habit,the utility of other habits like overeating or any kind of portion that affects the micro temporality creates a long difference in the human behaviour. In that context one indifference of temporality comes in my way of thought as the technical improvement in the world of cheap and sustainable technical imposition to increase the micro utility to support the entire product mix would be a great strategy concentric in case of the product generation.Hence a complete inversion of inverted utility to the actual utility function hence,the same is here the increase in marginal utility by relinquishing the smoking habit would be far more better replacement of everything having high utility function including a saviour in the irrational behaviour to the human being the high penetratiin of sustainability.

[@minthuta726]

These free courses are very useful for students from a third world country like me.

[@jamesdhuorchiengkueu3417]

I love this lecture. I'm economist who want to learn more.

[@yutikasingh5443]

POV: you're searching for the notes.

[@gunha8288]

27:41 I don't understand the part "du/dp = 0.5xc / root (pxc)" why 0.5? Can any one help me?

[@shivanshsubramanian5525]

dU/dP = d(root(PC))/dP = 0.5*C/root(PC) Its just differentiation

[@user-ze1tc1ur9p]

@@shivanshsubramanian5525 where's the 0.5 from? and why 0.5*c／root(pc)....thanks..

[@davidbarroso8523]

@@user-ze1tc1ur9p The derivative of a function (ax)^n is a*n*(ax)^(n-1) where a is a constant. The square root of PC is equivalent to saying (PC)^(1/2) or (PC)^0.5, so if you're deriving with respect to P, P is your x, C is a, and 0.5 is n, so the derivative would be C*0.5*(PC)^(0.5-1) or 0.5*C*(PC)^(-0.5). x^-n is equivalent to 1/(x^n), a negative power just means you move it to the denominator, so you get 0.5*C/(PC)^0.5, and again, x^0.5 is the same as square root of x, so finally you're left with 0.5*C/squareroot(PC). If you do it with respect to C, C is your x instead, you get 0.5*P/squareroot(PC). dU/dP means derivative of U w/ respect to P, dU/dC means derivative of U w/ respect to C.

[@ahmettayyipaydin6925]

@@davidbarroso8523 thank you so much. I was confused but I see now

[@Adityakumar-is2ke]

@@ahmettayyipaydin6925 thank you so much broo i just wasnt thinking of taking c as constant and your explaination cleared it up

[@nahasco]

Where can I watch the math courses guys? The ones he says are on friday...

[@chhandamachhangte655]

Thanks MIT

[@aliasjon8320]

Drafts : 36:00

[@nataliabishop5482]

What if I found a place that sold $5 cookies and not $6 so I could buy more for less? How would this effect the equation after the fact? I see how it’d stay if the $5 cookie was the original price but let’s say it’s not..? That or like.. what if there’s a sale?

[@suindude8149]

In the post Covid days the budget constratint has its niche to identify the inflationary rate in case of buying the inventory in case of Economic quantity demanded with the revised assumptions. Hence,its most pivotal for the downward slope in the production curve of the industrial phenomenon. Hence,all the subsidirat affecting the quantity demanded will be the hardest portion which needs the utmost discussion often. Thus marginal replacement of goods may be a hugh value in case of diminishing of marginal returns in case of managers.

[@ardythe14]

Very nice! Also this showed that 4Ps (in the Philippines) is not a good aide to alleviate poverty.

[@pushtysuri6373]

Can someone explain why A offers more utility on less budget?? I mean-- MUc/MUp > Pc/Pp??

[@suindude8149]

it might be arising out of the budgetary notion in case of planning or strategizing for the optimal output or utility in sense of personal micro Economics to derive the high value of constrained budget of the whole in case of the value generation of the industrial output.

[@UnTipoAnziUnTopo]

Excellent lecture, I'm finding this course very useful. However, I have a doubt about the last example, regarding the SNAP program and the effectiveness of so-defined "paternalism": Prof. Gruber said that, since giving poor people food stamps instead of cash made them buy 15% more food, that choice would not be that good because that constraint would make those people less happy, so it is better to just give cash and make them do the choice. But if, for example, the goal of the government was to fight malnutrition, wouldn't then be better to force poor people to consume that 15% more food? I feel like the topic was not treated deeply enough to cover these (in my opinion, relevant) cases

[@user-dx7ox3uo4d]

Does anyone know where 0.5 comes from in 26:50 ? Thanks a lot!!

[@fevengetachew1035]

It is from derivation of the squareroot like the derivation of squareroot of xy is (1\2 times square root of xy )times the derivation of xy itself.....i am not sure if I explained it in understandable way but I suggest you to derivate the function by yourself first and crosscheck it

[@anudeike]

I think it comes from the fact that the Pizza is worth twice as much as the cookies so P_c/Pp = 0.5. Not sure exactly but that's what it seems.

[@jela1277]

12:54 Where are these black and red dots he is talking about?

[@heya-fq2nb]

Here maybe he's talking about the attainable and non attainable combinations where initially the dots were up to previous budget line but now they are within new budget line(black ones) and the remaining between new and previous budget line (red) are not attainable.

[@rajeshmishra7157]

At 29:05 how is market telling that we can trade a cookie for only half slice of pizza?

[@lucayan7982]

where can i find the "math" part of the course. 19:15 he said they will do more mathmatically on friday

[@rm2kmidi]

I didn't go to MIT, but when I took Microeconomics we did all the math in our quiz sections and not during the lecture.

[@lucayan7982]

@@rm2kmidi do you know how can I get quiz that they did?

[@rm2kmidi]

@@lucayan7982 not a quiz. Quiz sections are smaller class groups you attend, usually lead by a TA. So the students would be learning this on non-lecture days.

[@rm2kmidi]

@@lucayan7982 "Quiz Section" is what we call the smaller breakout classes in large lecture classes at universities in the US. It doesn't have anything to do with quizzes or taking tests. Typically you attend lecture three times a week and attend quiz section twice a week. I was just explaining that the math-oriented parts of this class were likely all discussed in smaller groups with the teaching assistant and probably wont be on video. At least that's how it was when I was in school.

[@lucayan7982]

@@rm2kmidi thank you for the clarification

[@dennis7928]

QUESTION: minute 28.48 > " you're willing to give up 2.5 p for 1 c" is incorrect right? Looking at the graph (minute 29.18) the indifference curve looks like that you're willing to give up 2.5 p for 2 c as the interval on the x axis is not 1 but 2. Can someone either tell me that I am right, but more likely explain why I am wrong?

[@7amseel]

"You're willing to give up 2.5 P for 1 C" is correct. If you look at the graph (29:18) more closely, you will see that at point A, the value at x axis is 2, but also the value of y axis is 5. So basically, you are willing to give up 5 pizzas for 2 cookies which is same us giving up 2.5 pizzas for 1 cookie.

[@kloud1174]

I'm just a small successful business owner just soaking up this information. Don't mind me....

[@bhavikaborawat8323]

Shouldn't the decrease in budget constraint (imposed by parents) lead the students to opt the cookies more because they are cheaper and hence the slope of curve to change (increase -vely) thus creating a fractional MRT?

[@7amseel]

MRT is the ratio of market prices of two goods. It is independent of your income or budget constraints. The decrease in income will in some combination lower both the amount of cookies and the amount of pizza. However, the exact combination by which pizza slices and cookies get lowered depend upon your utility function which ultimately makes your indifference curve.

[@nox5282]

Budget constrained is key to happiness

[@user-kl7mu7rz1n]

anyone care to help me on 27:59 why MuP=dU/dP has a equation of 0.5xC?? where does the C comes from? I am totally fine with the derivative part, I know where the 0.5 comes from, but C?? why Mu of Pizza has anthing to do with cookies?

[@user-kl7mu7rz1n]

the question actually translate into how to calculate dP... I forgot all my learning on derivatives of that part.

[@uditabhattacharya2824]

26:12 watch continue to see food stamps and cash transfer

[@sumanchowdhury6162]

As someone who came from Architecture to economics, know things different. In architecture it's said - less s more In economics - more s better than less

[@SakshiSingh-xq1ze]

Can u recommend series lecture of intermediate macroeconomics ?

[@jat1339]

@@SakshiSingh-xq1ze macroeconomics k liye nptel k kaafi ache hai lecture

[@vishnukanhan8809]

Wow if I can ask what made you switch from architecture to economics?

[@bloodcarnage8285]

Nice..

[@yanneschen179]

I don’t understand 16:00 the question : Changing slope does not affect if one buy more cookies than pizza and overall decrease in income affect all. Please help me thanks

[@jela1277]

Your question is hard to understand, but I can explain that because the slope is the ratio of the quantity of cookies to pizza, changing the slope means you change the quantity of cookies or pizza or both (see algebra)

[@tianshuzhao6966]

he is saying that the budget changes (since your disposable income decreases) but the proportion of trade-off between two products remains (since the price of each type remains and the value of each type for you is the same. i.e. the marginal substitution for you is the same). you see the parallel shift of the budget lines but the slope remains.

[@deletedaccount2580]

I was searching for guy who post notes of lecture in comment . But sadly didn't find .

[@vishnukanhan8809]

Same lol

[@oluwagbamila]

I got lost with the optimum constraints calculation, any help here please

[@miltonfriedman5833]

Does anyone know how to access the recitation for the course, or if its available.

[@mitocw]

Recitations are not available for the course. To see what we do have, visit MIT OpenCourseWare at: ocw.mit.edu/14-01F18. Best wishes on your studies!

[@miltonfriedman5833]

@@mitocw tnx.

[@dennis7928]

​@@mitocw QUESTION: minute 28.48 > " you're willing to give up 2.5 p for 1 c" is incorrect right? Looking at the graph (minute 29.18) the indifference curve looks like that you're willing to give up 2.5 p for 2 c as the interval on the x axis is not 1 but 2. Can someone either tell me that I am right, but more likely explain why I am wrong?

[@frostylunetta]

If I were a Math/IT/Science student back at high school, and without budget constraints, I would have applied for MIT

[@mitocw]

If you were that high school student, we would tell you to ignore the budget constraints and recommended you apply anyways. 🙂 MIT is need-blind and full-need. If you were accepted, MIT would make sure you could afford MIT tuition... even if they had to fully cover it. Visit sfs.mit.edu/undergraduate-students/the-cost-of-attendance/making-mit-affordable/ for more info.

[@economics5595]

@@mitocw this comment made my day today! :)

[@user-hj2td8qs7j]

My marginal utility is very high so i intend to attend mit

[@defyingfinance9882]

What you described at the end really is the saying, you can’t make a poor man rich. The concept of wisdom over dolllars. Teach a man to fish type of thing. People who get money quick don’t know how to manage it unless they have earned the wisdom prior.

[@sahilnegi4326]

Explaing these concepts without calculus must be difficult for him. And its actually very confusing for the math folks too.

[@codisordelet8380]

This course would be considered an intermediate microeconomics course at most universities.

[@Andalusian_]

Think so too. They probably do the multivariable calculus in the side-lectures

[@elkyelkyelky]

27:00

[@tvvt005]

38:42 I still don’t get why there is a horizontal line from 5000 to x2, could someone explain?

[@Michelle_Matchahan]

hey hey. Because government gave the poors the debit card which can be only used for food, the people cannot use this money for shelters. Therefore, people cannot spend any money to shelters and now it has restricted in that 5000

[@user-ff1tv2ie2w]

where did 0.5 come from when doing MUp and MUc?

[@suindude8149]

These equation is quite tricky to make the indifference in the buying behaviour of the product in case of obtaining diligence of his entire family. It seems the Economics is tremendously the unitasking.

[@gytoser801]

19:36

[@sanajjang96]

27:27, where did the 0.5 come from??

[@chaitanyasharma3921]

He differentiated root p*c, which is equal to 0.5 *C or P( depends on what is taken constant)/root of P*C

[@elkyelkyelky]

2:00

[@oris2723]

Can y'all tell me why that cash given to Africans boosted their income in short run and the effect got nullified in long run?

[@yellowusbrickus4821]

Probably something to do with structural inequality issues, for example an insurance firm may offer insurance to rich people, R or poor people, P. When P takes out insurance on their cheaper car, the risk of it breaking down are higher and therefore their insurance costs will be higher as a proportion of their income. This could take away P's ability to increase their wealth because the insurance costs eventually wear away their initial endowment. If the group used their money to buy cars to double their wages, they would not be able to afford good cars and thus they would be subject to high insurance costs, leading them back to a point of not being able to afford insurance or a car. This example is obviously not what happened but in built mechanisms can lead to greater wealth inequality over the longer term.

[@shoaibmalik2231]

I am late but at perfect place

[@hish3098]

3:30 they are delicious and equally expensive

[@gunnarjensen5910]

λ*, Mv = Mp ? The best deal. ? P = MR = MC ?

[@suindude8149]

While price goes for Marginal revenue then there comes the law of diminishing returns in the case with Marginal cost equating price as well.

[@shantanukhandkar]

Is this an undergraduate or graduate course?

[@mitocw]

This is an undergraduate course. See ocw.mit.edu/14-01F18 for more info and materials. Best wishes on your studies!

[@bulbulddd8]

what is du/dp? 26:54 ?????????????????????????????????????????????????

[@user-js4ez2yz9b]

Derivative

[@davidbarroso8523]

The derivative of a function (ax)^n is a*n*(ax)^(n-1) where a is a constant. The square root of PC is equivalent to saying (PC)^(1/2) or (PC)^0.5, so if you're deriving with respect to P, P is your x, C is a, and 0.5 is n, so the derivative would be C*0.5*(PC)^(0.5-1) or 0.5*C*(PC)^(-0.5). x^-n is equivalent to 1/(x^n), a negative power just means you move it to the denominator, so you get 0.5*C/(PC)^0.5, and again, x^0.5 is the same as square root of x, so finally you're left with 0.5*C/squareroot(PC). If you do it with respect to C, C is your x instead, you get 0.5*P/squareroot(PC). dU/dP means derivative of U w/ respect to P, dU/dC means derivative of U w/ respect to C.

[@tianshuzhao6966]

marginal utility of one unit of product A divided by that of product B. this indicating the marginal substitution between these two products to remain the same level of utility.

[@oris2723]

Can y'all tell me why that cash given to Africans boosted their income in short run and the effect got nullified in long run?

[@user-re1su6el4l]

👍👍

[@Auriga4]

Summary: sometimes we just have to tangent our Pp more often, it's called marginal utility.

[@primozbenedicto3501]

Interesting college professor

[@robbyosborne9708]

He definitely makes the subject of microeconomics interesting.

[@tammy6452]

Move in with someone and give them your food stamps for shelter, go to the food bank for food.

[@siqihe7806]

Never thought of SNAP as paternalistic, make me think of universal income, maybe cash to everyone is not a bad thing.

[@rm2kmidi]

I feel like people shouldn't think of it as an entitlement but that their friends and neighbors that pay taxes want to help them, but want some say on how that money is spent. Also, wouldn't person y still be better off because it frees up $300 for more shelter. They're not $500 better, but they're not worse off.

[@6and1]

AI push will eventually lead to a more universal income approach due to job losses but if you create a linear equation they haven't quite perfected the income but it's around $1250 a month. You would most likely need a a wide adoption of the digital dollar to track spending on illicit things

[@spankyrodriguez007]

MIT budget restraints why they use chalk boards? I'm so distracted by this poor guy struggling through the series and hung up thinking of the opportunity costs.

[@muhammad-amiindhimbiil6066]

We are forcing them on Food Stamps, because Someone who is below poverty line will use Cash for other purposes.

[@sethkohn5517]

I just gave this video it's 1k like, because I like pizza and cookies

[@GiorgiBochikashvili]

its 20 under the root, not 10.

[@martingenet8799]

46 min in

[@aasemahsan]

Simplying assumption: Budget=Income 5:25 MRT Shocking the System 17:05 *Constrained Choices* 30:58 Example of food stamps

[@tyranmcgrath6871]

Funny how $12 for pizza is expensive in america

[@Learn2SingInEnglish]

why would it not be? hes talking about per slice

[@tyranmcgrath6871]

@@Learn2SingInEnglish right you are

[@tyranmcgrath6871]

That's some premium pizza

[@d2nd21st]

yup UBI everyone, its actually better than government subsidize programs and such😆

[@keki4578]

23:06 BIG PP

[@jsealejandro06]

vox being a good policy website? That just makes me misstrust completly the opinion of this Professor.

[@Regular_guy798]

Славяне на месте?

[@williammuka2290]

So, what are cookies ?

[@afbdreds]

Food stamps don't buy diapers

[@arunsinghmehra7728]

Nptel lectures are way better than mit courses but i thank mit for the free courses though...

[@rakkhnaka]

lol

[@SakshiSingh-xq1ze]

Not way better but both r comparable nd good for students like us(budget constraints)

[@jat1339]

Are bhai chup chap pdh le na , dono ache hai

[@mirshahid4966]

Me watching at 0.25 speed

[@crisronaldo8365]

If they need cash people in my country (BD) will sell their food for money 😂

[@tasnimealami7846]

Please add Arabic subtitles

[@pulkityogi-jf1xk]

ab itne gandiwade me rhne ka koi matlab nhi h