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Chapter%2021%20Lecture%20Outline - Economics 101H Vandan...

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Economics 101H Vandan Desai P a g e | 1 Chapter 21: The Theory of Consumer Choice (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- I. The Budget Constraint: What The Consumer Can Afford A. The budget constraint depicts the consumption “bundles” that a consumer can afford given his income and the price of the goods B. People consume less than they desire b/c spending is constrained ( limited ) by income C. Slope of the budget constraint… i. Measures the rate at which consumer can trade one good for other ii. Equals the relative price of two goods —the price of one good compared to the price of the other II. Preferences: What The Consumer Wants A. A consumer’s preference among consumption bundles may be illustrated with an indifference curve – curve that shows consumption bundles that gives the consumer the same level of satisfaction B. The consumer is indifferent , or equally happy , on points on the same curve C. The slope at any point on an indifference curve is the marginal rate of substitution i. It is the rate at which a consumer is willing to substitute one good for another ii. It is the amount of one good that a consumer requires as compensation to give up one unit of the other good D. Four Properties of Indifference Curves i. Higher indifference curves are preferred to lower ones
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