Two Goods Are Often Enough

The two-good assumption is more general than you might think at first, since we can often interpret one of the goods as representing everything else the consumer might want to consume.

For example, if we are interested in studying a consumer's demand for milk, we might let x\ measure his or her consumption of milk in quarts per month. We can then let X2 stand for everything else the consumer might want to consume.

When we adopt this interpretation, it is convenient to think of good 2 as being the dollars that the consumer can use to spend on other goods. Under this interpretation the price of good 2 will automatically be 1, since the price of one dollar is one dollar. Thus the budget constraint will take the form

This expression simply says that the amount of money spent on good 1, pix 1, plus the amount of money spent on all other goods, X2, must be no more than the total amount of money the consumer has to spend, m.

We say that good 2 represents a composite good that stands for everything else that the consumer might want to consume other than good 1. Such a composite good is invariably measured in dollars to be spent on goods other than good 1. As far as the algebraic form of the budget constraint is concerned, equation (2.2) is just a special case of the formula given in equation (2.1), with P2 = 1, so everything that we have to say about the budget constraint in general will hold under the composite-good interpretation.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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