Chapter 7 Reading Notes

Chapter 7 Reading Notes - February 25, 2008 Chapter Seven:...

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February 25, 2008 Chapter Seven: Utility and Demand The Household’s Budget Household’s budget places a limit on its consumption choices Household’s preferences determine which of all its possible choices a household makes Household’s consumption choices are constrained by the household’s income and by the prices of the goods and services it buys Budget line – describes the limits to its consumption choices o Can be described by the relative price of the two goods and the consumer’s real income Relative price – the price of one good divided by the price of another good o Ex: $6 per movie, $3 per six-pack so relative price of a movie in terms of soda is 2 six-packs per movie. Opportunity cost of a movie is 2 six-packs. When a price changes, the relative price changes and the slope of the budget line changes o If the price of one good falls, budget line rotates outward and she can afford to consume more of both goods Real income – household’s income expressed as the quantity of goods that the household can afford to buy When money income changes, real income changes and the budget line shifts o But the slope of the budget line doesn’t change
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Chapter 7 Reading Notes - February 25, 2008 Chapter Seven:...

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