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13 Cards in this Set

  • Front
  • Back

budget line

describes the limits to the household consumption choices

budget equation

expenditure = income

P1Q1 + P2Q2 = Y

real income

where budget line meets x-axis

relative price

price of good 1


price of good 2

- slope of budget line

-shows how many product 1 must be forgone for an additional product 2

a change in price

if the price of the product on the x-axis increases, affordable quantity decreases

- slope increases (pivot left)

a change in income

if income decreases, graph shifts left

indifference curve

line that shows combinations of goods that are just as good as each other

preference map

a series of indifference curves

- curves that are higher are more preferred

marginal rate of substitution

measures rate at which a person is willing to give up good y to get an additional unit of good x (while being just as good!!)

magnitude of the slope of the indifference curve

- if the slope is steep, MRS is high

(willing to give up lots of y to get more x)

- if the slope is flat, MRS is love

(willing to give up small y to get more x)

diminishing marginal rate of substitution

general tendency for a person to be willing to give up less good y to get one more unit of good x

best affordable choice

- on the budget line

- highest attainable indifference curve

substitution effect

for a normal good, a fall in price always increases quantity consumed