ECN 104 Lecture Notes - Budget Constraint, Indifference Curve, Opportunity Cost

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ECN104Chapter 21 Notes
Chapter 21 Notes
Questions
oHow does the budget constraint represent the choices a consumer can
afford?
oHow do indifference curves represent the consumer’s preferences?
oWhat determines how a consumer divides her resources between two
goods?
oHow does the theory of consumer choice explain decisions such as how
much a consumer saves, or how much labour she supplies?
Introduction
oRecall one of the Ten Principles from Chapter 1: People face
tradeoffs.
Buying more of one good leaves less income to buy other goods
Working more hours means more income and more consumption,
but less leisure time
Reducing saving allows more consumption today but reduces
future consumption
oThis chapter explores how consumers make choices like these.
The Budget Constraint: What the Consumer Can Afford
oE.g., Hurley divides his income between two goods: fish and mangos.
oA “consumption bundle” is a particular combination of the goods, e.g.,
40 fish and 300 mangos
oBudget constraint: the limit on the consumption bundles that a
consumer can afford
The Slope of Budget Constraint
o“rise” = -200 mangos
o“run” = +50 fish
oSlope = -4
Hurley must give up 4 mangos to get one fish
oThe slope of the budget constraint equals
The rate at which Hurley can trade mangos for fish
The opportunity cost of fish in terms of mangos
The relative price of fish:
Price of fish / price of mangos
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