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# ch7 - Utility and Demand The Household's Budget A...

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Chapter 7 Utility and Demand The Household’s Budget A household’s budget line describes the limits to its consumption choices. It is a boundary between affordable and unaffordable combinations of goods and services. The budget constraint is analogous to the PPF but there is an important difference between the two. The budget constraint depends on prices but the does not depend on prices. The figure show’s Lisa’s budget line. Lisa has an income of \$30 a month. Pop costs \$3 a six-pack and movies cost \$6 each. If Lisa buys 10 six-packs a month, she has no money left for movies and she consumes at point A . If she sees 5 movies, she has no money left for pop and she consumes at point F . She can also consume at points B , C , D , and E . For items that are divisible, any point on the budget line can be chosen. The budget line tells us what is feasible. A household’s real income is the household’s income expressed as a quantity of goods the household can afford to buy. Expressed in terms of pop, Lisa’s real income is Y / P . A relative price is the price of one good divided by the price of another good. The relative price of a movie in terms of pop is the opportunity cost of a movie and the relative price of a movie in terms of pop is the magnitude of the slope of Lisa’s budget line. 1

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Preferences and Utility Preferences tell us about a consumer’s likes and dislikes. Economists use the concept of utility to describe preferences.
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ch7 - Utility and Demand The Household's Budget A...

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