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Western University
Economics 2150A/B

CHAPTER 4Insulinneeds to purchase fixed amount x would die with less and couldnt make use of any moreoWith income individual can buy required amount of insulin and spend rest on other goodsoICs begin after point x in this section insulin becomes a neutral good because cant do anything with more insulin beyond quantity x indifference curves increase verticallyIncome Subsidysubsidy of S dollars can choose to buy food andor other goodsow income subsidy value of I increases outward shift in budget constraint can purchase ALL of other goods ALL food or combination on new budget lineFood Stampsredeem for S dollars worth of food only extra food can be purchasedow food stamps value of I increases outward shift in budget constraint can purchase ALL food on new budget line combination and can only purchase other goods at level of original income because food stamp only allows use towards food products CREATES KINK IN GRAPHBorrowingLendingoEx vertical axis is composite goods next year horizontal is composite goods this year and at point A neither borrowing or lendingoDecreasing consumption this year by 1 increases consumption next year by 1r where r is interest gained from lending to the bankoTherefore slope1r vertical interceptI1r horizontal interceptI1rCHAPTER 5OPTIMAL CHOICEDEMANDPrice Consumption Curveset of utilitymaximizing baskets as price of one good varies holding constant income and prices of other good NOTE pivots on yinterceptoLower the price higher the indifference curve point rests onoDemand curvewillingness to pay which drops as you buy moreIncome Consumption Curveset of utility maximizing baskets as income variesoCurve that connect all optimal baskets along progressing ICs prices remaining constant oY axisgood y X axisgood xEngle Curvesgraph relating amount of the good consumed to the level of income prices remaining constantoY axisIncome level X axisgood xoPositive slope for income where good is normal negative slope for income where good is inferiorNormal goodpositive income elasticity of demandInferior goodnegative income elasticity of demandFinding a Demand CurveoCobbDouglasMUMUPP isolate for ysolve for x by substituting into equation for budget linexyxyoPerfect SubstituteMUMUPP isolate for x solve for y by substituting into equation for budget linexyxyCHANGE IN PRICE OF A GOOD SUBSITUTION AND INCOME EFFECTSubstitution effectchange in quantity of good consumer would purchase after price change to achieve same level of utilityIncome Effectchange in purchasing power purchasing power ex when pricepurchasing powerbecause consumer can buy same basket of goods as before and still have money left over to buy more goodsBOTH occur at the SAME TIME when price of a good changes
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