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13 Cards in this Set
- Front
- Back
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budget line |
describes the limits to the household consumption choices |
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budget equation |
expenditure = income P1Q1 + P2Q2 = Y |
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real income |
where budget line meets x-axis |
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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 |
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a change in price |
if the price of the product on the x-axis increases, affordable quantity decreases - slope increases (pivot left) |
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a change in income |
if income decreases, graph shifts left
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indifference curve |
line that shows combinations of goods that are just as good as each other |
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preference map |
a series of indifference curves - curves that are higher are more preferred |
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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!!) |
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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) |
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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 |
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best affordable choice |
- on the budget line - highest attainable indifference curve |
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substitution effect |
for a normal good, a fall in price always increases quantity consumed |
