Some goods substitute so easily for each other that

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Some goods substitute so easily for each other that most of us do not even notice which we are consuming Some goods do not substitute for each other at all. Instead, they are complements The closer the two goods are to perfect substitutes, the closer the marginal rate of substitution is to being constant (a straight line), rather than diminishing (a curved line) How are consumer choices predicted? When one makes their best affordable choice, they spend all their income and it is on their highest attainable indifference curve The best affordable point is on the budget line Every point on the budget line lies on an indifference curve
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Marginal rate of substitution equals relative price The effect of a change in the price of the quantity of a good consumed is called the price effect When the price falls, the budget line rotates outward and becomes flatter We can see that the law of demand and the downward sloping demand curve are consequences of a consumer’s choosing her or his best affordable combination of goods The effect of a change in income on buying plans is called the income effect A change in incomes leads to a shift in the demand curve The substitution effect is the effect of a change in price on the quantity bought when the
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  • Spring '08
  • Rush
  • Marginal rate

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