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Here is a question that deals with the notion of exogenous variables and your ability to consume goods and services.

Let's say that you live on a Pacific Island with a bunch of other people. Let's say as well is that your "profession" is to make and sell "wind kites". This is a very desirable form of entertainment for the islanders. The market has determined the price of what you make (wind-kites), and the prices of all of the other things that you want to buy. You consume coffee and candy as goods X and Y. Your income is from the sale of wind-kites.

You face two issues: First, you really what more coffee and candy than you can afford, and Second, some other people are out there also making wind-kites. So, what do you propose to do to raise your "income" (push out your budget constraint) in order to consume more of these two items that you really crave? How would you represent your successful efforts on a two-dimension graph? What if the price of coffee skyrockets?

What happens to your graph? What happens to your consumption of coffee and candy of both are normal goods? What additional steps might you take to maintain your purchasing power over the goods you demand to consume?

When it comes to your manufacture of wind-kites, can you think in what ways any accumulated knowledge and wisdom on the island (the past experience and efforts of other people) helps you in your profession?

Note: there are many possible answers to (8), but all follow a correct micro-economic logic.

And this is an economic logic that we all face every day of our lives in the real world.

Microeconomics, Economics

  • Category:- Microeconomics
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