Chapter_8 - Ch.8:...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
    Ch. 8: Consumption Possibilities, Preferences and Choice Consumption Possibilities: The Budget Line Preferences: The Indifference Curve Consumer Equilibrium or the Utility-Maximizing Choice       (using the budget line and indifference curves) Model Predictions (for price change, income change etc)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
    Consumption Possibilities:  The Budget Line Household consumption choices are constrained by its  income and the prices of the goods and services  available The budget line  describes the limits to the household’s  consumption choices
Background image of page 2
    Budget Equation We can describe the budget line by using a budget equation The budget equation states that Expenditure = Income Call the price of pop  P P , the quantity of pop  Q P , the price of a  movie  P M , the quantity of movies  Q M , and income  Y . Lisa’s  budget equation is P P Q P  +  P M Q M  =  Y
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
    Budget Equation: P P Q P  +  P M Q M  =  Y Divide both sides of this equation by  P P , to give    Q P  + ( P M /P P )Q M  =  Y/P P The term  Y/P P  is Lisa’s real income  in terms of pop The term  P M /P P   is the relative price  of a movie in terms of pop Budget Equation
Background image of page 4
    Budget Equation: Y/P P  = Q P  + ( P M /P P )Q M Intercepts measure real income in movies ( x -intercept),  pop ( y - intercept)   P m    flatter budget line, fixed pop (y)-intercept   P p    steeper budget line, fixed movie (x)-intercept  Y   leftward parallel shift budget line Budget Equation
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
    A relative price  is the price of one good divided by the  price of another good It is the magnitude of the slope  of the budget line The relative price shows how many pops must be  forgone  to see an additional movie  Budget Equation
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
    Preferences: Indifference Curves (IC) An indifference curve  (IC) is a line that shows combinations of  goods among which a consumer is indifferent
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/25/2010 for the course ECON ECON 1000 taught by Professor Noordeh during the Fall '09 term at York University.

Page1 / 33

Chapter_8 - Ch.8:...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online