EC120 Lecture Notes - Lecture 21: Budget Constraint, Indifference Curve, Demand Curve
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Optimization (best choice = preferred and affordable: pizza only. = liters of pepsi: 50 pizzas cost , left buys 250 liters of pepsi. The budget constraint: what the consumer can afford. Budget constraint - limit on consumption bundles that a consumer can afford. Assuming there are two goods, it shows there"s a trade-off the consumer faces between the two goods. Slow of budget constraint equals the relative price of the two goods: the price of one goods compared to the price of the other. If prices fall the slope - good one slope becomes flatter. Consumers choices not only depend on budget constraint but also their preferences regarding the two goods. Indifference curve: a curve that shows consumption bundles that give the consumer the same level of satisfaction. Marginal rate of substitution - slope of indifference curve. Higher indifference curves are preferred to lower ones.
