Chapter_8 - Ch.8 , :TheBudgetLine Preferences: (...

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    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)
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    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
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    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
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    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
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    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
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    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
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    Preferences: Indifference Curves (IC) An indifference curve  (IC) is a line that shows combinations of  goods among which a consumer is indifferent  (i.e. which give him  equal satisfaction )
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