EC120 Chapter Notes - Chapter 21: Budget Constraint, Indifference Curve, Consumer Choice
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EC120 Full Course Notes
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All of the options are all equally good. Optimization under constraints-consumers will choose the best option available. Always a linear constraint (set amount of money) Consumers can spend money anyway they want within the budget. Slope of a budget constraint represents opportunity cost or relative costs. Indifference curves represent combinations of goods that are valued equally. Consumers value all bundles on the same indifference curve equally. Slope of the curve, shows the marginal rate of substitution. Rate at which a consumer is willing to trade off goods against each other. Consumer choice is an example of constrained optimization. Budget constraint defines the set of possible choices. The optimal point is where the indifference curve is tangent to the budget constraint. Indifference curve is tangent to the budget constraint. At the optimum-marginal rate of sub equals relative price. Trade-off by consumers equals trade-off by the market. Increase in prices usually leads to reduced consumption.
