ECON 1000 Chapter Notes - Chapter 8: Marginal Utility, Indifference Curve, Real Income
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Consumption choices are limited by income and by prices. Budget line shows the limits to a household"s consumption choices. Relative prices: price of one good divided by the price of another good. A change in income (y) changes real income if px and py remain constant. The budget line shifts leftward or rightward, but its slope does not change. Diminishing marginal utility explains why demand curves slope downward (are negatively sloped). A consumer"s preferences can be represented by indifference curves. Indifference curve: a line that shows combinations of goods that yield the same level of utility. The consumer prefers any point on the indifference curve to any point below. The consumer is indifferent between different points on the curve. If there"s a few indifference curves on the same chart, the consumer prefers a point on the curve that"s more to the right hand side. Mrs is represented by the slope of the indifference curves.