ECON 10010 Lecture Notes - Lecture 4: Peanut Butter, Relative Price, Inferior Good
Document Summary
This rate is called the marginal rate of substitution: marginal rate of substitution- the rate at which a consumer is willing to trade one good for another. Income and substitution effects: people make decision based on getting the best outcome for themselves that they can given their budget constraints. Budget constraint - the limit on the consumption bundles that a consumer can afford. The slope of the budget constraint measures the rate at which the consumer can trade one good for the other. Slope of bc = relative price of the two goods. Ex: suppose that i have an income is , and i can spend that income on peanut butter, or. Slope = rise/run = 200/400 = 1/2 = price j / price pb. Marginal rate of substitution - slope is rate at which i am willing to trade pb for jelly. Properties of indifference curves: higher indifference curves are preferred to lower ones.
