Ch. 22 Flashcards
(12 cards)
What is budget constraint?
The limit on the consumption bundles that a consumer can afford
How does a change in income or price of a good change a consumer’s budget constraint?
What is an indifference curve?
A curve that shows consumption bundles that give the consumer the same level of satisfaction
What is the marginal rate of substitution?
The rate at which a consumer is willing to trade one good for another
What are the four properties of indifference curves?
1) Higher indifference curves are preferred to lower ones: People usually prefer to consume more rather than less. This preference for greater quantities is reflected in the indifference curves.
2) Indifference curves slope downward: The slope of an indifference curve reflects the rate at which a consumer is willing to substitute one good for the other. In most cases, the consumer likes both goods, so if the quantity of one good decreases, the quantity of the other good must increase for the consumer to be equally happy. For this reason, most indifference curves slope downward.
3) Indifference curves do not cross
4) Indifference curves are bowed inward: The slope is the marginal rate of substitution. Because people are more willing to trade away goods that they have in abundance and are less willing to trade away goods of which they have little, so the indifference curves are bowed inward toward the graph’s origin.
What are perfect substitutes?
Two goods with straight-line indifference curves.
What are perfect complements?
Two goods with right-angle indifference curves
How does a budget constraint graph change for a normal good?
How does a budget constraint graph change for an inferior good?
What is the income effect?
The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
What is the substitution effect?
The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution
