ch 09 possibilities, preferences and choices.docx

3 Pages
112 Views
Unlock Document

Department
Accounting & Financial Management
Course
AFM 102
Professor
Tom Vance
Semester
Fall

Description
09 – possibilities, preferences andchoices Chapter 9: Possibilities, Preferences and Choices Consumption Possibilities  budget line: describes the limits to its consumption choices  divisible and indivisible goods  divisible goods can be bought in any quantity (gas, electricity)  suppose all goods are indivisible to get a better understanding of household choices  affordable and unaffordable quantities  points outside of the budget line are unaffordable and points under the budget line are affordable Budget Equation expenditure  income expenditure P x P xQ yY y Q  Py Q  Y x P y P x x Y Py Q x  Q y Px Px  real income is household income expressed as a quantity of goods that the household can afford to buy  real income = Y/Px  relative price: the price of one good divided by the price of another good  relative price of good X in terms of good Y =xPy/P  also the opportunity cost of consuming x (in terms of y) ΔP y  slope of the budget line: ΔP x  when prices change, the budget line changes (more specifically, the slope of the budget line & intercepts)  ex: if the price falls, the budget line rotates outward and become flatter  when income changes, the intercepts of the budget line changes, but slope stays the same Preferences and Indifference Curves  indifference curve: a line that shows combinations of goods among which a consumer is indifferent  a consumer is just as happy to consume any combinations of x and y on the indifference curve  a consumer will prefer a point above the indifference curve and not a point below the curve Marginal Rate of Substitution (MRS)  marginal rate of substitution: the rate at which a person will give up good y to get one more unit of good x  the slope of an indifference curve measures the MRS  if the indifference curve is steep, then MRS is high and a person is willing to give up a a lot of y for more x  if the indifference curve is flat, then MRS is low and a person is willing to give up a little of y for more x  diminishing marginal rate of substitution: a general tendency for a person to be willing to give up less of good y to get more of good x while at the same time remaining indifference as the quantity of x increases Degree of Substitutability  close substitutes: goods which substitute so easily that consumers can’t tell the difference between the 2  indifference curve have a slope of -1  complements: goods which are bought/used together (left running shoe and right running shoe)  perfect complements have an indifference curve in an “L” shape (corner @ (1,1)) page 1 of 3 09 – possibilities, preferences andchoices Predicting Consumer Choices Best Affordable Choice  a consumer spends on their income and is on their highest attainable indifference curve to make the best affordable choice  the best affordable choice
More Less

Related notes for AFM 102

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit