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Ch. 9

by: Brie Burnett

Ch. 9 Econ 2020

Brie Burnett

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Test 2
Principles of Economics: Microeconomics
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This 1 page Class Notes was uploaded by Brie Burnett on Friday October 7, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by Banerjee in Fall 2016. Since its upload, it has received 8 views.


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Date Created: 10/07/16
10/4/16 Chapter 9: Possibilities, Preferences, and Choices ­Indifference Curve (IC)  Curve that shows the combinations of goods among which a consumer is  indifferent (i.e. all of the consumption choices generate the same level of utility)  Combinations of goods that generate the same level of utility   Curves are always parallel to each other, cannot overlap   Intersections of two indifference curves cannot be true   All points on the same curve are indifferent to one another, have same utility  IC gets flatter as you go down the curve, consume more & more along x axis  Curve has a negative slope  Slope gets flatter as x increases  Change in y/ change in x = how much can good y change when good x changes  Marginal Rate of Substitution (MRS)= amount of good y that I am willing to give  up to get one more unit of good x   Better indifference curves are to the northeast   Max utility given budget=reach highest IC I can afford   MRS=MUx/MUy=Px/Py ­Change in Price  Normal goods: dec. purchasing power means we buy less  Inferior goods: dec. purchasing power means we buy more  ­Two Effects of Price Change   Substitution Effect o Change in Qd as a result of change in relative price (change in slope of  budget line) o New slope of budget line tangent to original IC o AB  Income Effect:  o Change in Qd as a result of change in purchasing power (moving to a new  IC) o BC  Income effect > sub. Effect  giffen good


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