Unit 3 Flashcards
choices determined by?
preference
consumption possibilities (prices, income)
utility?
reflects the consumer’s preference
will choose greater utility over the less utility
indifference curves?
represents combinations of goods that provide given level of utility
all points above indifference curve is preferred
slope of indiffernece curve?
marginal rate of substitution
as you move down the indiffernece curve, the MRS diminishes, meaning you are less willing to trade for an additional unit –> therefore called diminishing MRS
MRS calc?
change in y / change in c = (-) MRS
constraints consumers face?
income and price
represented by budget constraint
budget line equation?
Y = price(x) . quantity(x) + price(y) . q(y)
change in price?
end up buying more or less of that product
line (slope) swings to left (price increase) or right (price decrease)
change in income?
end up buying less or more of both products
slope is unaffected becuase the relative (ratio) prices remains the same, line moves up or down
consumer choice?
optimal point is where budget line and highest attainable indifference curve intersect, MRS = MRT
income effect?
shifts parallel inwards (slope of budget line remains the same)
moves to another indifference curve
normal goods?
quantity consumed increases as income increases
consumption and free time are normal goods
inferior goods?
quantity consumed decreases as income increases
price effect?
- only one of axis (product that’s price change) shifts out or in
- MRT and MRS changes
- different indifference curve
- will end up buying more or less of the other product
- divided into to steps: income effect and substitution effect
substitution effect?
moves along same indifferent curve to new optimal combination
