ECON1010 Lecture Notes - Lecture 7: Great Famine (Ireland), Inferior Good, Substitute Good
All diagrams come from Patricia Ramirez de la Vina’s powerpoint “Consumer Choice Power Point Notes”
Lecture 7 Notes - Consumer Choice
Budget Constraint
● People face tradeoffs
○ Can use income on one good or another
○ Fixed income = budget constraint
○ All combinations of two goods (consumption package) a consumer can
potentially purchase with their income
○ (P1xQ1) + (P2xQ2) = Income
■ P = price, Q = Quantity
○
○ A point to the right of the budget constraint represents a consumption
package unaffordable to the consumer
Indifference Curves
● Indifference Curve: shows consumption bundles that give the consumer the same
level of satisfaction
○ Satisfaction is also called utility
○
● Four properties of indifference curves
○ Downward sloping-negative slope
○ Higher indifference curves are preferred to lower ones
■ Each bundle on a higher curve is preferred to a point on a lower
indifference curve.
○ Indifference Curves cannot cross
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Document Summary
All diagrams come from patricia ramirez de la vina"s powerpoint consumer choice power point notes . Can use income on one good or another. All combinations of two goods (consumption package) a consumer can potentially purchase with their income (p1xq1) + (p2xq2) = income. A point to the right of the budget constraint represents a consumption package unaffordable to the consumer. Indifference curve: shows consumption bundles that give the consumer the same level of satisfaction. Higher indifference curves are preferred to lower ones. Each bundle on a higher curve is preferred to a point on a lower indifference curve. Opportunity costs change at different parts of an indifference curve. Exception: when the goods are perfect complements the indifference curve is a right angle. When the goods are perfect substitutes the indifference curve is linear. The rate at which a consumer is willing to trade one good for another. Mrs = slope of the indifference curve.
