ch8 - Chapter 8 Possibilities, Preferences, and Choices...

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Unformatted text preview: Chapter 8 Possibilities, Preferences, and Choices Consumption Possibilities A households budget line describes the limits to its consumption choices. Lisa has $30 a month to spend, the price of pop is $3 a six-pack, and the price of a movie is $6. The figure shows Lisas budget line. Its position depends on Lisas income and on the prices she faces. The Budget Equation In General In Lisa's Case 1. The variables: Income = Y Y = $30 Price of a movie = P M P M = $6 Price of pop = P P / P P = $3 Quantity of movies = Q M Quantity of pop = Q P 2. The budget: P P Q P + P M Q M = Y $3 Q P + $6 Q M = $30 3. The budget line: P P Q P + P M Q M = Y Divide both sides of equation by P P Q P + ( P M / P P ) Q M = Y/P P Subtract ( P M / P P )Q M from both sides of equation Q P = Y/P p - ( P M P P ) Q M 4. The budget line with numbers: $3 Q p + $6 Q M = $30 Divide both sides of equation by P P ($3) Q P + ($6 / $3) Q M = $30 / $3 Subtract ($6/$3) Q M from both sides of equation Q P = 10 - 2 Q M When the price changes, so does the budget line. When the price of a movie decreases, the budget line rotates outward and when the price of a movie increases, the budget line rotates inward. A change in money income changes real income but does not change relative prices. When income decreases, the budget line shifts inward. When income increases, the budget line shifts outward. Preferences and Indifference Curves An indifference curve is a line that shows combinations of goods among which a consumer is indifferent....
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This note was uploaded on 06/30/2009 for the course ECON 1020 taught by Professor Parkin during the Spring '09 term at UWO.

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ch8 - Chapter 8 Possibilities, Preferences, and Choices...

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