Textbook Notes (363,233)
Canada (158,276)
Economics (727)
ECON 1B03 (302)
Chapter 21

Chapter 21

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McMaster University
Usman Hannan

CHAPTER 21: THE THEORY OF CONSUMER CHOICE The Budget Constraint: What the Consumer Can Afford - spending is constrained by ones income - budget constraint: the limit on the consumption bundles that a consumer can afford (the tradeoff) - slope signifies what is given up of one good to get some of another good = relative price Preferences: What the Consumer Wants Representing Preferences with Indifference Curves - the consumer can choose between 2 bundles of goods with the amount of money they have, if each meets their tastes equally the consumer is indifferent between the 2 bundles - indifference curve: shows consumption bundles that give the consumer the same level of satisfaction - marginal rate of substitution (MRS): the rate at which a consumer is willing to trade one good for another (not always the same since the line is a curve) - higher indifference curves are always preferred to lower curves (consuming more) Four Properties of Indifference Curve - 1) higher indifference curves are preferred to lower ones: people prefer more of something to less of it, therefore the higher curve represents a greater quantity the consumer receives - 2) indifference curves are downward sloping: in most cases the consumer likes both goods, so as the quantity of one good decreases the quantity of the other good increases - 3) indifference curves do not cross: false assumptions would be made if they did - 4) indifference curves are bowed inward: people
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