ECON 200 Chapter Notes - Chapter 21: Budget Constraint, Indifference Curve, Opportunity Cost
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What the consumer can afford given the income and price of goods. Budget constraint: the limit on the consumption bundles that a consumer can afford. The rate at which the consumer can trade one good for another. (slope- opportunity cost) Indifference curve: shows the consumption bundles that give the consumer the same level of satisfaction. Marginal rate of substitution: the rate at which a consumer is willing to trade one good for another. Choose the point on the higher indifference curve. Higher indifference curves are preferred to lower ones. (get more) Perfect substitutes: two goods with straight line indifference curves. Perfect complements: two goods with right angle indifference curves. The point at which the indifference curve and the budget constraint touch is called the optimum. (tangent) Slope of indifference curve is the marginal rate of substitution (consumer) Slope of the budget constraint is the relative price (market) Choose where the marginal rate of consumption equals the relative price.