Chapter 9 Flashcards
Indifference curves
Shows combinations of goods among which a consumer is indifferent
Preference map
A system of indifference curves that work like contour lines on a map.
Properties of indifference curves
- Higher indifference curves are preferred to lower ones
- Downward sloping
- Convex
- Do not cross (each other)
Explain why higher indifference curves are preferred
Higher indifference curves represent larger quantities of goods than do lower indifference curves.
Marginal rate of substitution (MRS)
The rate at which a person is willing to give up good y, to get an additional unit of good x and remain on the same indifference curve (thus remaining equally satisfied).
(The absolute magnitude of the slope at any point on an indifference curve.)
Why are indifference curves convex
People are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little.
These differences in a consumer’s MRC case the curve to bow inward.
Diminishing marginal rate of substitution
The general tendency for a person to be willing to give up less of good y to get one more unit of good x as the quantity of good x he/she has increases.
Degree of Substitutability
The shape of the indifference curves reveals the degree of substitutability between two goods.
The consumers best affordable (optimal) point is:
- On the budget line
- On the highest attainable indifference curve
- Has a marginal rate of substitution between the two goods equal to the relative price of the two goods.
Price effect
The effect of a change in the price of a good on the quantity consumed
Income effect
The effect of a change in income on the quantity of a good consumed
Substitution effect
The effect of a change in price on the quantity bought when the when the consumer remains indifferent between the original situation and the new situation.
Substitution is indicated by a movement along the indifference curve.
