Intro to Microeconomics Chapter 9 (Indifference Curves)

goods like gasoline and electricity that can be bought in any quantity desired
think of all goods as divisible for now

(P of good 1)(Q of good 1) + (P of good 2)(Q of good 2) = income
P₁Q₁ + P₂Q₂ = I
^sometimes income is labelled Y

flip it to y = mx + b form:
Q₁ = I/P₁ - (P₂/P₁)Q₂

its income expressed as a quantity of goods that the household can afford to buy
income / price = quantity
Y / P₁ = Q₁ for good 1

the price of one good divided by the price of another
AKA the opportunity cost of the good in the numerator
AKA the slope of the budget line

flatter

steeper

it shifts outward, but its slope remains the same

preferred, not preferred, and indifferent

a line that shows combinations of goods among which a consumer is indifferent
separates "preferred" and "not preferred" areas on a preference map
every point along the curve is equally preferred (has equal utility)

U for utility

points along an indifference curve are always more preferred than points along an indifference curve to the left of it

hundreds representing different levels of satisfaction
northeast is better unless we are talking about a bad good like pollution

the MRS
the rate at which a person will give up the good on the y-axis to get an additional unit of the good on the x-axis while remaining on the same indifference curve
or, the absolute value of the slope of the indifference curve at a certain point (slope of the tangent line)

indifference curve: MRS = ∆Q(good 1) / ∆Q(good 2)
budget line: Price(good 2) / Price(good 1)

where MRS = P(good 2)/P(good 1)

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

the curve is bowed toward the origin if the two goods are not perfect substitutes or perfect complements

not CLOSE substitutes, but yes
the more money I spend on soda, the less I spend on movies

down-ward sloping straight line
constant MRS

L-shaped
because having two right shoes is no better if I only have one left shoe

because the more of one good I have, the more I am willing to give up for one more unit of the other good

they are poor substitutes

NEVER

a point on her highest attainable indifference curve where she spends all of her income on movies and soda (meaning it's on the budget line)
where the slope of the budget line equals the slope of the highest attainable indifference curve (AKA relative price = MRS)

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 plans

shifting of the budget line as well as the demand curve

real income increases IF it is a normal good
if it is an inferior good, ?????????

the effect of a change in price on the quantity bought when the consumer remains indifferent between the original situation and the new situation

it is relative to the other good (?)

I buy more food and less clothing (the good on the other axis)

negative

if the negative income effect equals the positive substitution effect, a fall in price leaves the quantity bought the same
if the negative income effect is smaller than the positive substitution effect, a fall in price increases the quantity bought and the demand curve slopes downward
if the negative income effect is greater than the positive substitution effect, a fall in price decreases the quantity bought and the demand curve slopes upward

a good that results in an upward sloping demand, meaning that we buy more as price increases
good must be inferior and account for a huge portion of our income

the point on my budget line that is tangent to the highest possible indifference curve

the intercept for the unchanged good is the same, but to get the intercept for the good with the new price, you divide income by the new price

economics that does not assume that all consumers are rational
economics + psychology

when we have the choice between options and one options is irrelevant but it still affects our decision making
irrational

irrationality

when we choose the default option even though there may be a better option
irrational

when our answer depends on the way a question is phrased
irrational; if we were rational, our answer would always be the same