# LS 80 - CHAPTER 7 Utility and Demand The Households Budget...

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1 Utility and Demand CHAPTER 7 The Household’s Budget Consumption Possibilities A household’s consumption possibilities are constrained by its income and the prices of the goods and services it buys. A household has a given amount of income to spend and cannot influence the prices of the goods and services it buys. A household’s budget line describes the limits to a household’s consumption choices. The Household’s Budget Figure 7.1 shows a budget line for movies and soda. The household can afford all the points on or below the budget line. The household cannot afford the points beyond the budget line.

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2 The Household’s Budget Relative Price A relative price is the price of one good divided by the price of another good. The price of a movie is \$6 and the price of soda is \$3 a six-pack. So the relative price of a movie is \$6 per movie divided by \$3 per six-pack, which equals 2 six-packs per movie. The Household’s Budget A Price Change A change in the price of the good on the x -axis changes the affordable quantity of that good and changes the slope of the budget line. Figure 7.2(a) shows the rotation of a budget line after a change in the relative price of movies. The Household’s Budget Real Income A household’s real income is the household’s income expressed as the quantity of goods that the household can afford to buy. Expressed in terms of soda, Lisa’s real income is 10 six- packs—the maximum quantity of six-packs that she can buy. Lisa’s real income equals her money income (\$30) divided by the price of a six-pack (\$3).
3 The Household’s Budget A Change in Income An change in the income brings a parallel shift of the budget line. The slope of the budget line doesn’t change because the relative price doesn’t change. Figure 7.2(b) shows how the budget line shifts when income changes. Preferences and Utility Preferences A household’s preferences determine the benefits or satisfaction a person receives consuming a good or service. The benefit or satisfaction from consuming a good or

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## This note was uploaded on 11/23/2011 for the course ECON 202 taught by Professor Brightwell during the Fall '08 term at Texas A&M.

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LS 80 - CHAPTER 7 Utility and Demand The Households Budget...

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