Principles of Economics- Mankiw (5th) 460

Principles of Economics- Mankiw (5th) 460 - 474 PA R T S E...

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474 PART SEVEN ADVANCED TOPIC HOW CHANGES IN PRICES AFFECT THE CONSUMER’S CHOICES Let’s now use this model of consumer choice to consider how a change in the price of one of the goods alters the consumer’s choices. Suppose, in particular, that the price of Pepsi falls from $2 to $1 a pint. It is no surprise that the lower price ex- pands the consumer’s set of buying opportunities. In other words, a fall in the price of any good shifts the budget constraint outward. Figure 21-9 considers more specifically how the fall in price affects the budget constraint. If the consumer spends his entire $1,000 income on pizza, then the price of Pepsi is irrelevant. Thus, point A in the figure stays the same. Yet if the con- sumer spends his entire income of $1,000 on Pepsi, he can now buy 1,000 rather than only 500 pints. Thus, the end point of the budget constraint moves from point B to point D. Notice that in this case the outward shift in the budget constraint changes its
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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