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Final

# ECONOMICS_FINAL_EXAM_NOTES_.docx.pdf

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School
Department
Economics
Course
ECON 1010
Professor
Semester
Spring

Description
all combinations graphed above are constrained by Lisas 40 budgetThe budget line is a constraint on Lisas consumption choices Lisa can afford any point on her budget line or inside it Lisa cannot afford any point outside her budget lineDIVISIBLE GOODScan be bought in any quantity desired ie gas electricity when we think of goods as being divisible the consumption possibilities are not only the points A through F shown on the above graph but also the infinite number of points that form the line running from A to FINDIVISIBLE GOODScannot be bought in any quantity desired ie you cannot buy half a phone or half of a tshirtConstraint on consumptionbudget changes when the price of a good or income changes BUDGET EQUATION ExpenditureSpendingincome Expenditure sum of the price of each good multiplied by the quantity boughtIncomebudget available EXAMPLE Call the price of pop P the quantity of pop Q the price of a movie P PPMthe quantity of movies Q and income Y MLisas budget equation isPQPQY PPMM REAL INCOMEa households income expressed as a quantity of goods that the household can afford to buy incomeprice of a goodEXAMPLE Lisas income is 40 and cost of pop is 4 Real income expressed in terms of pop is 40410 This quantity is the maximum quantity of pop she can buy and is the y intercept of the budget line graph RELATIVE PRICEthe price of one good divided by the price of another goodrelative price also equals opportunity cost of the good and the magnitude of the slope of the budget lineEXAMPLE the relative price of a movie in terms of pop is the price of a movie divided by the price of a pop 842 This means that in order to watch 1 movie Lisa must give up 2 cases of pop This is the opportunity cost of watching a movie because in order to watch 1 movie Lisa must forgo 2 cases of pop 2 is also the magnitude of the slope of the budget line CHANGES IN PRICEthe lower the price of the good measured on the x axis the flatter the budget line Relative price of x axis good fallsThe higher the price of the good measured on the x axis the steeper the budget line Relative price of x axis good increasesCHANGES IN INCOMEchanges in income change real income but not relative price budget line shifts but magnitude of slope does not changeincrease in income results in an increase in real income and the budget line shifts to rightdecrease in income results in decrease in real income and budget line shifts left
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