Chapter 21 Microeconomics

shows the consumption bundles that the consumer can afford
$100 budget
12-pack is 10 bucks
A burger is 2 bucks
You could buy a maximum of 10 12 packs or 50 burgers with your budget

rate at which consumer can trade one good for another
- relative price of the two goods (one compared to the other)

two or + bundles suit their tastes equally well

shows the various bundles of consumption that make the consumer equally happy-
different points on one indifference curve all make the consumer equally happy/satisfied

slope of indifference curve- the rate at which the consumer is willing to substitute one good for the other, if the quantity of one good is reduced the quantity of the other must increase to keep consumer happy

are preferred to lower ones, because consumers always prefer more consumption to lower consumption

reflects the rate at which the consumer is willing to substitute one good for the other, if the quantity of one good is reduced the quantity of the other must increase

would contradict preference for higher curves

because the slope changes

when the MRS is constant, creates straight lined indifference curve- rare

create right angled difference curves

the point at which the indifference curve and the budget constraint meet
the slope of the indifference curve= the slope of the budget constraint (MRS=relative price)
indifference curve is tangent to budget constraint
relative price- rate at which market is willing to trade
Marginal Rate of Substitution- rate at which consumer is willing to trade

consumer can afford more of both goods
shifts budget constraint outward- parallel shift
-slope stays the same, prices aren't changing

both goods are normal- optimum will increase with an income increase

1 good inferior- buy more of the normal good & less of the inferior when income increases
2 good inferior- optimum decreases with income increase

lower prices expands consumers buying opportunities- shifting budget constraint outward- also changes slope & optimum

the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
- price of one good lowers: your income is "higher"- you can afford more of both goods
prices higher: your income is "lower"- you can afford less goods

the change in consumption that results when a price change moves the consumer along a give indifference curve to a point with a new marginal rate of substitution
- price of good 'A' lowers: you should buy more of good 'A' and less of good 'B' because now it is even MORE to pick B over A (MRS)
-price of 'A' increases: you should buy less of A and more of B