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Principles of Economics- Mankiw (5th) 452

Principles of Economics- Mankiw (5th) 452 - 466 PA R T S E...

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466 PART SEVEN ADVANCED TOPIC The slope of the budget constraint measures the rate at which the consumer can trade one good for the other. Recall from the appendix to Chapter 2 that the slope between two points is calculated as the change in the vertical distance di- vided by the change in the horizontal distance (“rise over run”). From point A to point B, the vertical distance is 500 pints, and the horizontal distance is 100 pizzas. Thus, the slope is 5 pints per pizza. (Actually, because the budget constraint slopes downward, the slope is a negative number. But for our purposes we can ignore the minus sign.) Notice that the slope of the budget constraint equals the relative price of the two goods—the price of one good compared to the price of the other. A pizza costs 5 times as much as a pint of Pepsi, so the opportunity cost of a pizza is 5 pints of Pepsi. The budget constraint’s slope of 5 reflects the tradeoff the market is offering the consumer: 1 pizza for 5 pints of Pepsi. QUICK QUIZ:
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