AS.180.101 Chapter Notes - Chapter 6: Unearned Income, Budget Constraint, Indifference Curve
Document Summary
Economy"s task: allocate inputs and allocate outputs: in a market economy, the instruments of this allocation are prices. Consumers earn income by selling inputs (mostly labor) to entrepreneurs. But virtually none of us work to our absolute limit. At some point the extra income is not worth it; we would rather have leisure. By going to work, we are giving up some of our leisure time in exchange for consumer goods. Graphing leisure versus consumption (the sum of money spent on goods): we use consumer"s indifference curves between leisure and consumption. The consumer likes both leisure and consumption (same rules apply; objective: to get to highest ic) The consumer will go to the highest indifference curve he an afford with his budget constraint. This graph works (indifference curves with y axis: consumption and x axis: leisure in hours) because when we give up leisure time, we assume that we are working thus gaining income.
