Economics 1021A/B Lecture Notes - Indifference Curve, Substitute Good, Divisor

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October 15 2012
Chapter 9, p204-213
Consumption Possibilities
Limited by income and prices
Budget line limits to consumer choices
Divisible and Indivisible Goods
Divisible bought in any quantity desired (gas, electricity)
Any point on the budget line
Affordable and Unaffordable Quantities
Budget line marks what is affordable and not affordable
Afford anything on budget line and below it
Cannot afford anything outside of the line
Budget Equation
Expenditure ([Price x Quantity] of each good) = Income
PXQX + …(other goods)…. = Y
Real Income
Income expressed as a quantity of goods that the household can afford to buy
Money income / price of the good
Relative Price
Price of one good divided by the price of another good
Slope = change in the variable measured on the y-axis / change in the
variable measured on the x-axis
A Change in Prices
Lower the price of the good on x-axis, flatter is the budget line
o Afford more
Higher price on x-axis, steeper the line
o Afford less
A Change in Income
A change in money income changes real income but does not change the
relative price
Budget line shifts
No change in slope
Increases in money, increase real income, shift budget line right
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Document Summary

Budget line limits to consumer choices. Divisible bought in any quantity desired (gas, electricity) Budget line marks what is affordable and not affordable. Afford anything on budget line and below it. Cannot afford anything outside of the line. Expenditure ([price x quantity] of each good) = income. Income expressed as a quantity of goods that the household can afford to buy. Money income / price of the good. Price of one good divided by the price of another good. Slope = change in the variable measured on the y-axis / change in the variable measured on the x-axis. Lower the price of the good on x-axis, flatter is the budget line: afford more. Higher price on x-axis, steeper the line: afford less. A change in money income changes real income but does not change the relative price. Increases in money, increase real income, shift budget line right. Decrease in money income, decrease real income, shift left.

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