ECON ch 9, Economics Chapter 9, Chapter 8 – Microeconomics

What keeps you from actually buying everything you want. (You can't spend more than you have)

which marks the boundary between those combinations of goods and services that a household can afford to buy and those that it can not afford.

Describes the limits to the household's consumption choices

Shows all the combinations of goods that you can afford

prices of goods and services available

a description of her likes and dislikes

represents the tradeoff between the two goods

Indivisible - bought at whole units (like movies)
Divisible - bought at any quantity (like gas, electricity)

as the benefit or satisfaction that a person gets from the consumption of goods and services.

Maps of levels of consumption that give us a certain level of utility

Above the budget line is unaffordable, below is affordable

the total benefit that a person gets from the consumption of all the different goods and services

When the indifference curve is at its highest point.

Expenditure = Income, i.e. Income = (price of x)(quantity of x) + (price of y)(quantity of y) --> rearrange so that the variable on the y axis is what the equation is equal to!

the change in total utility that results from a one-unit increase in the quantity of a good consumed

the tendency for marginal utility to decrease as the consumption of a good increases is so general and universal that we give it status of a principle.

1) The relative price changes (change in the slope of the budget line).
2) Real income also changes.

the income expressed as a quantity of goods; point on her budget line where it meets the y-axis (i.e. income/y ($)

the change in real income (The income effect) and to the change in relative price (substitution effect)

the price of one good divided by the pricce of another good; ($) y / ($) x = answer in terms of x; same as opportunity cost, the quantity of x must forgone for more y

is a situation in which a consumer has allocated all of his or her available income in the way that maximizes his or her total utility, given the price of goods and services.

due to the shrinking or expanding area beneath the budget line

a line that shows combination of goods that a consumer is indifferent; preferred is above the curve, not preferred is below

is the marginal utility from a good that results from spending one more dollar on it

due to the change in the slope of the budget line.

Marginal rate of substitution: measures the rate at which a person is willing to give up good y to get an additional unit of good x while at the same time remaining on the same indifference curve (remaining indifferent); slope of the indifference curve

studies the way in which limits on the human brain's ability to compute and implement rational decisions influences economic behavior - both the decisions that people make and the consequences of those decisions for the way markets work.

Can be bought in any quantity desired. (Ex: Gasoline and electricity) Consumption point are not just point A and B but everything in between too.

MRS high; MRS low

the study of the activity of the human brain when a person makes an economic decision

Expenditure= Income
Expenditure= (price of x multiplied by quantity of x)
[P= price Q=quantity]
P(x)Q(x) +P(y)Q(y)= Income

A person willing to give up less of good y to get one more unit of good x, while remaining indifferent

A households income expressed as a quantity of goods that they can afford to buy.

located on the budget line, on highest attainable indifference curve, and has a marginal rate of substitution between the two goods equal to the relative price of the two goods

the price of one good divided by the price of another good. [P(x)/P(y)] <--calculates opportunity cost

changes the opportunity cost and the slope of the budget line

The flatter the budget line

shifts the budget line

real income; relative price.
The budget line will shift but the slope will stay the same.

the relative price on the y-axis rises

base don't the appealing idea that people can sort all the possible combinations of goods into three groups: preferred, not preferred, ad indifferent. Series of indifference curves that resemble the contour lines on a map.

real income decreases

a line that show combinations of goods among which a consumer is indifferent.

magnitude of the slope of the budget line

(MRS)the rate at which a person will give up good y ( the good measured on the y axis) to get an additional unit of good x (good measured on the x axis) while remaining indifferent

because then consumers aren't indifferent between the two indifference curves

the marginal rate of substitution is high. The person is willing to tie up a large quantity of good y to get an additional unit of good x while remaining indifferent

substitutes are straighter

the marginal rate of substitution is low. The person is willing to give up a small amount of good y to get an additional unit of good x while remaining indifferent.

The combination on the highest indifference curve

the general tendency for a person to be willing to give up less of good y to get one more unit of good x while at the same time remaining indifferent as the quantity of x increases

how willing a person is to substitute one good for another while remaining indifferent.

their indifference curves are straight lines that slope downward

are L shaped curves

When you spend all your income and are at the highest attainable indifference curve

the budget line.

Relative Price

The effect of a change in the price of a good on the quantity of the good consumed

The effect of a change in income on buying lans

increases the quantity bought.

effect of a change in price on the quantity bought when the consumer remains indifferent