EC120 Chapter Notes - Chapter 21: Giffen Good, Budget Constraint, Indifference Curve
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The budget constraint: what the consumer can afford. Budget constraint: the limit on the consumption bundles that a consumer can afford. Indifference curve: shows the various bundles of consumption that make the consumer equally happy. Marginal rate of substitution (mrs): the rate at which a consumer is willing to trade one good for another. Rate at which a consumer is willing to trade one good for the other depends on the amounts of the goods he is already consuming. Higher indifference curves are preferred to lower ones: preference for greater quantities is reflected in the indifference curves. Indifference curves are downward sloping: rate at which the consumer is willing to substitute one good for the other. Indifference curves are bowed inward: slope of an indifference curve is the marginal rate of substitution. When the goods are easy to substitute for each other, the curves are less bowed. When the goods are hard to substitute, the indifferences curves are very bowed.