eco9.21 - Budget Constraint The slope of the budget...

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Budget Constraint •The slope of the budget constraint line equals the relative price of the two goods, that is, the price of one good compared to the price of the other. •It measures the rate at which the consumer can trade one good for the other Representing Preferences with Indifference curves •An indifference curve is a curve that shows consumption bundles that give the consumer the same level of satisfaction •MTS-rate at which consumer is willing to trade Consumer is trying to get to the highest indifference curve given his At A, MRS XY = P X /P x How Changes in Price Affect Consumer’s Choices A fall in the price of any good rotates the budget constraint outward and changes the slope of the budget constraint •A price change has two effects on consumption •An income effect •A substitution effect Deriving the Demand Curve •A consumer’s demand curve can be viewed as a summary of the optimal decisions that arise from his or her budget constraint and indifference curves
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This note was uploaded on 04/20/2008 for the course ECON 304K taught by Professor Ledyard during the Spring '08 term at University of Texas.

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