Economics 1021A Chapter 9 20131022
Household consumption choices are constrained by its income and the prices of the goods and services
The budget line describes the limits to the household’s consumption choices.
Some goods are indivisible goods and must be bought in whole units at the points marked (such as
Other goods are divisible goods and can be bought in any quantity (such as gasoline).
The budget line is a constraint on Lisa’s consumption choices.
Lisa can afford any point on her budget line or inside it, but she cannot afford any point outside her budget
We can describe the budget line by using a budget equation:
Expenditure = Income
Lisa’s budget equation iP P P + PMQ M =Y.
A household’s real income is the income expressed as a quantity of goods the household can afford to
Lisa’s real income in terms of pop is the point on her budget line where it meyts the axis.
A relative price is the price of one good divided by the price of another good.
Relative price is the magnitude of the slope of the budget line.
The relative price shows how many cases of pop must be forgone to see an additional movie.
A rise in the price of the good on xhe axis decreases the maximum affordable quantity of that good and
increases the slope of the budget line.
A change in money income brings a parallel shift of the budget line.
The slope of the budget line doesn’t change because the relative price doesn’t change.
An indifference curve is a line that shows combinations of goods among which a consumer is
All the points on the indifference curve are preferred to all the points below the indifference curve.
All the points above the indifference curve are preferred to all the points on the indifference curve.
A preference map is a series of indifference curves.
The marginal rate of substitution, (MRS) measures the rate at which a person is w