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Ch07 - Chapter 7 Utility and Demand I The Households Budget...

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C h a p t e r 7 : U t i l i t y a n d D e m a n d I. The Household’s Budget A. Consumption Possibilities 1. A household’s consumption choices are constrained by its income and the prices of the goods and services it buys. 2. A household’s budget line describes the limits to its consumption choices. 3. Figure 7.1 shows a budget line, which separates those combinations of goods that the household can afford (points below and on the budget line) from those combinations that it cannot afford (points above the budget line). B. Relative Price 1. A relative price is the price of one good divided by the price of another good. a) The magnitude of the slope of the budget line is the relative price of the good measured on the x -axis. b) A change in the relative price changes the slope of the budget line. c) Figure 7.2 (a) shows how changes in the relative price of a movie rotates the budget line. C. Real Income 1. A household’s real income is the household’s income expressed as the quantity of goods that the household can buy. a) A change in real income shifts the budget line but does not change its slope. b) Figure 7.2 (b) shows how changes in real income shift the budget line. II. Preferences and Utility A. A household’s preferences determine the benefits or satisfaction a person receives consuming a good or service. 1. The benefit or satisfaction from the consumption a good or service is called utility . B. Total Utility 1. Total utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more utility. 2.

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Ch07 - Chapter 7 Utility and Demand I The Households Budget...

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