ECON 10010 Lecture Notes - Lecture 10: Normal Good, Real Income, Budget Constraint
Document Summary
Class structure: prayer, review: constraints, review: preferences, review: optimal choice, example: a shift outwards in the budget constraint, leaving the slope constant. Income effect: example: a twist of the budget constraint, leaving the indifference curve constant. Lecture: our constraints have a sub-constraint that is income. Bc shifts out with a constant slope = can"t lose consumption of any of the goods. Increase in real income induces a positive income effect. As income increases = better indifference curve is reached. Decrease in income = negative income effect. Substitution effect is about changing the slope of bc while the ic remains constant. Moving downward the indifference curve = substituting one good for another: total consumption graph. Find a point b such that the change in consumption from a to b is the substitution effect, and from b to c is the income effect. B needs to be on the initial indifference curve and have the slope of the final bc.
