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Chapter 5

Chapter 5- Constraints, Choices, and Demand.pdf

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Department
Economics
Course
ECON 2310
Professor
B Ferguson
Semester
Fall

Description
Chapter 5- Constraints, Choices, and Demand September 22, 2013 7:48 PM Definitions Income- a consumers income consists of the money received during some fixed period of time Budget Constraint- identifies all of the consumption bundles a consumer can afford over some period of time Budget Line- shows all of the consumption bundles that just exhaust a consumers income Rationed- when the government or a supplier limits the amount that each consumer can purchase, we say that the good is rationed Interior Choice- an affordable bundle is an interior choice if, for each good, there are affordable bundles containing a little bit more of that good and affordable bundles containing a little bit less of it. When the best affordable choice is an interior choice, we call it an interior choice Tangency Condition- a bundle on the budget line satisfies the tangency condition if, at that bundle, the budget line lies tangent to the consumer's indifference curve Boundary Choice- at a boundary choice there are no affordable bundles that contain either a little bit more or a little bit less of some good. When the consumer's best choice is a boundary choice, we call it a boundary solution Price-Consumption Curve- shows how the best affordable consumption bundle changes as the price of a good changes, holding everything else fixed (including the consumers income and preferences as well as all other prices) Individual Demand Curve- describes the relationship between the price of a good and the amount a particular consumer purchases, holding everything else fixed Income Effect- the change in the consumption of a good that results from a change in income Income Consumption Curve- shows how the best affordable consumption bundle changes as income changes, holding everything else fixed (including prices and the consumer's preferences) Engel Curve- describes the relationship between income and the amount consumed, holding everything else fixed (including prices and the consumers preferences) The Properties of a Budget Line 1) The budget line is the boundary that separates the affordable consumption bundles from all other bundles. Choices that do not exhaust the consumer's income lie to the southwest of the budget line 2) The slope of the budget line equals the price time -1 =, with the
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