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Chapter 9

Economics 1021 Chapter 9 Notes

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Western University
Economics 1021A/B
Jeannie Gillmore

Chapter 9 Consumption Possibilities  Budget line: The limits to a household’s consumption choices o Consumer choices are limited by income and by prices, and households cannot influence the price of goods and services it buys. o Divisible goods: Goods that can be bought in any quantity desired (assumed) o Indivisible goods: Goods that can be bought in set quantity (intermediate points) o Affordable quantities: The area inside the budget line and the points on it are affordable o Unaffordable quantities: The area outside the budget line is unaffordable.  Budget equation: o Expenditure: Sum of the price of each good multiplied by the quantity bought (assumed to be same as income) o Given expenditure = price of (1) x quantity of (1) + price of (2) x quantity of (2)  Y = P1Q1+ P 2 2  ⁄ = Q 1 ⁄ Q2  Q1= ⁄ ⁄ Q2 o Real income: A household’s income expressed as quantity of good that the household can afford to buy  Point at which the budget line intersects the y ax)s ( ⁄ o Relative price: The price of one good divided by the price of the other.  Magnitude of the slope of the budget lin⁄ (  Equivalent to the opportunity cost of a good o When the price of a good measured on the x-axis increases, the budget line rotates inward (vice versa) o When income decreases, the budget line shifts inward (vice versa) Preference Curve  Indifference curve: Line that shows combinations among which a consumer is indifferent. o Convex shaped o Has no relation to prices or any other variables o A consumer is just as happy to consume any point on the indifference curve. o A consumer prefers the combinations above the indifference curve to those inside or un
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