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Shows all the combinations of 2 goods that exhaust the consumer's budget [image] |
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Is the budget line, where slope is price ratio of two goods. [image] |
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A set of points that includes all the combinations of goods that a consumer can afford, given that the consumer's income and the prices of the goods. |
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| Consumer's prefrences are defined by... |
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| indifference curves, whos slope is the marginal rate of substitution. |
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| To find the price ratio or the market trade off |
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| you find the slope of the budget line (the rise) divided by the run |
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| An indifference curve represents |
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| the fundamental idea that there are different ways for a consumer to reach a particular level of satisfaction, or what economist call utility |
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| An indifference cuve shows |
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| the different combinations of 2 goods that generate the same level of utility or satisfaction |
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| All combinations above the indifference curve generate higher utility than combinations on the curve |
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| All the combinations below the indifference curve generate lower utility than combinations on the curve |
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| All combinations along the indifference curve gnerate the same utility as combination. So the consumer would be indifferent to all the points on the indifference curve |
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What is the Marginal Rate of Substitution (MRS)? |
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To keep utility constant, there is a negative relatipnship between books and movies, so the indifference curve is negatively sloped. The slope of the curve is called the marginal rate of substitutio between two goods; it is the rate at which the consumer is willing to substitute one good for another. The indiffernce curve becomes flatter as we move downward along the curve [image] |
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| How would a consumer maximize utility? |
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| To maximize utility the consumer finds |
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