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Lecture 8

Economics 1021A/B Lecture Notes - Lecture 8: Normal Good, Indifference Curve, Relative Price

Course Code
ECON 1021A/B
Michael Parkin

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Chapter 9
Consumption possibilities
The budget equation
oexpenditure = income
Make sure income is equal to the price times the quantity consumed plus
price of second good times quantity consumed of second good
Households real income is the income expressed as a quantity of goods the
household can afford to buy
Relative price is the price of one good divided by the price of another
Magnitude of the slope of the budget line
Preferences and indifference curve
oLine that shows combinations of goods among which a consumer is indifferent
Marginal rate of substitution
oMeasures the rate at which a person is willing to give up good y to get an
additional unit of good x while at the same time remain indifferent (remain on the
same indifference curve)
oMagnitude of the slope of the indifference curve measures the marginal rate of
Predicting consumer choices
We want to be on the budget line, consume goods
Be on the highest possible indifference curve which also being on the budget line
Only way to be on both budget line and highest possible indifference curve is if marginal
rate of substitution is equal to relative price
Slope of indifference curve = sloep of budget line
For a normal good, if a price falls, quantity consumed increases
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