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ECON 1000 Cha. 9 Notes.docx

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ECON 1000
Sadia Mariam Malik

ECON Chapter 9 Jot Notes Consumption Possibilities - Budget line – limits to consumption choices Divisible and Indivisible Goods - Divisible goods – can be bought in any quantity desired (ex. gas & electricity) Affordable and Unaffordable Quantities - Affordable goods – quantities on the budget line and inside it - The constraints of consumption depends on the price and the income Budget Equation P = Price Q = Quantity P1Q1 + P2Q2 = Income Real Income - Income expressed as quantity of goods that the household can afford Relative Price - The price of one good divided by the price of another good - Magnitude = highest value of Y/highest value of X - Magnitude = relative price= opportunity cost A Change in Price - The lower the price of the good on the X-axis, (all other things stay the same), the flatter is the budget line, and vice versa - Real income does not change but relative prices change - Change in slope, but budget line does not shift A Change in Income - Real income change but relative prices do not change - Budget line shifts, but slope does not change Preferences and Indifference Curves - Indifference curve = a line that shows combination of goods among which a consumer is indifferent Marginal Rate of Substitution - Marginal rate of substitution (MRS) = the rate at which a person will give up good y to get an additional unit of good x while remaining indifferent (on the indifference curve) - If the indifference curve is steep, the marginal rate of substitution is high (the person is willing to give up a large quantity of good y to get an additional unit of x) - If the indifference
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