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Consumption Possibilities Chapter 9.docx

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Economics 1021A/B
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Consumption Possibilities Consumption choices are limited by income and by priceA household has a given amount of income to spend and cannot influence the prices of the goods and services it buysA households budget line describes the limits to its consumption choicesUsually combinations exhaust income Divisible and Indivisible Goods Divisible goods can be bought in any quantity desired Examples are gasoline and electricityWe can best understand household choice if we suppose that all goods and services are divisibleIndivisible goods cannot be bought in any quantity desiredExamples are boats and pencilsAffordable and Unaffordable Quantities The budget line is a constraint on choicesmarks the boundary between what is affordable and what is unaffordable You can afford any point on the line or inside it You cant afford outside the lineThe constraint on consumption depends on the prices and incomeThe constraint changes when the price of a good or when income changesBudget EquationExpenditureIncomeExpenditure is equal to the sum of the price of each good multiplied by the quantity boughtFor example Pop and Movies would be ExpenditurePrice of pop x Quantity of popPrice of movie x Quantity of moviesPrice of pop is PPQuantity of pop is QPPrice of movie is PMQuantity of movies is QMWe can now say PPQPPMQMYReal Income
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