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Chapter 9 - Possibilities, Preferences, and Choices.docx

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ECON 101
Corey Van De Waal

Chapter 9 Possibilities Preferences and Choices Consumption possibilities Consumption choices are constrained by income and prices of goodsservices Budget line is the limit to the households consumption choicesPoints within the budget line can be affordedPoints outside the budget line cannotThe budget equationexpenditureincome o Can be PQ PQY 11 22 Where P is price multiplied by Q quantityDivide both sides by Pwhich becomes Q PPQYP 1 1 2121 Subtract PPQfrom both sides which becomes Q YP PPQ 212 1 1 212 YPis Lisas real income in terms of good 1 1o Real income is expressed as a quantity of goods the household can afford to buy o Real income is the point on the budget line where it meets the yaxisPP is the relative price of good in terms of good 2121o Relative price is expressed as the price of one good divided by the price of anothero Relative price is the magnitude of the slope of the budget line o Shows how many good must be sacrificed to have an additional good 12A Change in Prices A rise in the price of the good on the xaxis decreases the affordable quantity of the same good while increasing the slope of the budget line relative price of the two goodsA Change in income A change in income brings a parallel shift of the budget line The slope doesnt change because the relative price doesnt change
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