AFM102 Chapter Notes -Indifference Curve, Opportunity Cost, Inferior Good

• School: University of Waterloo
• Department: Accounting & Financial Management
• Course: AFM102
• Professor: Tom Vance

Document Summary

Budget line: describes the limits to its consumption choices. 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. We can derive a consumer"s demand curve for good by looking at the changes in price and the changes in the quantity at the best affordable point. Substitution effect and income effect substitution effect: the effect of a change in price on the quantity bought when the consumer remains indifferent between the original substitution and the new one. When the price of good x falls, suppose we cut the consumers income to the income level that is just enough to keep the best affordable point on the same indifference curve.