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Principles of Economics- Mankiw (5th) 449

Principles of Economics- Mankiw (5th) 449 - suits your...

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IN THIS CHAPTER YOU WILL . . . Decompose the impact of a price change into an income effect and a substitution effect Apply the theory of consumer choice to four questions about household behavior Analyze how a consumer’s optimal choices are determined See how a budget constraint represents the choices a consumer can afford Learn how indifference curves can be used to represent a consumer’s preferences See how a consumer responds to changes in income and changes in prices When you walk into a store, you are confronted with thousands of goods that you might buy. Of course, because your financial resources are limited, you cannot buy everything that you want. You therefore consider the prices of the various goods being offered for sale and buy a bundle of goods that, given your resources, best
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Unformatted text preview: suits your needs and desires. In this chapter we develop the theory that describes how consumers make de-cisions about what to buy. So far throughout this book, we have summarized con-sumers’ decisions with the demand curve. As we discussed in Chapters 4 through 7, the demand curve for a good reflects consumers’ willingness to pay for it. When the price of a good rises, consumers are willing to pay for fewer units, so the quan-tity demanded falls. We now look more deeply at the decisions that lie behind the demand curve. The theory of consumer choice presented in this chapter provides T H E T H E O R Y O F C O N S U M E R C H O I C E 463...
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