EC120 Chapter Notes - Chapter 21: Budget Constraint
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EC120 Full Course Notes
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Bundle of goods: quantity of commodities that the consumer purchases. Budget constraint: the limit on the consumption bundles that a consumer can afford. Shows the tradeoff the consumer faces between two goods (q1, q2) Equals the relative price of the two goods. Describes the rate at which the consumer can trade one good for the other. Any consumption bundle above the line is not affordable, anything on and below is affordable. Change in income shifts the budget constraint curve. When commodity prices change and income stays the same, can afford more of that good. Then causes curve to shift steeper in the direction of the commodity whose price changes. When the price of a commodity changes, the relative quantity of the commodity changes (curve rotates outward (price decreases) or inward (price increases)) Show the consumption bundles that give the consumer the same level of satisfaction. All points on the same curve are equally preferred.