Budget Constraint
all possible combinations of goods and services that can be attained given current prices and limited income
Economists believe that individuals’ decisions, such as which goods and services to buy, can be analyzed as choices made within certain budget constraints.
Budget Line
a graphical representation of a consumers budget constraint
This question will be answered with an analysis of the consumer’s budget line, which shows all the combinations of goods consumers can purchase using their full budget.
Price Ratio
the slope of the budget line, represents the price of x in terms of good y
The meaning of the budget line’s slope or price ratio is the same as the slope of a PPF.
Size Effect
the impact of a price change on the purchasing power of the consumer
While the slope effect has clearly made the relative price of T-shirts lower, the size effect is uncertain.
Slope Effect
the impact of a price change on the relative prices of good x and y
While the slope effect has clearly made the relative price of T-shirts lower, the size effect is uncertain.
Diminishing Marginal Rate of Substitution
The more of a good one consumes, the less desirable it becomes. Represented by MRS falling as x increases on an indifference curve.
The more pizza you already have, the fewer movies you will give up for one more slice, showing a diminishing marginal rate of substitution.
Indifference Curve
a graph representing all consumption opportunities that a consumer holds as equal value
This question will be answered with an analysis of the consumer’s indifference curve, which shows all the bundles of goods that give the consumer the same amount of happiness, or utility.
Marginal Rate of Substitution
the rate at which a consumer is willing to give up one good for another without a change in utility; the slope of the indifference curve
The slope of the indifference curve is the marginal rate of substitution (MRS).
Strictly Convex Preferences
a good becomes less desirable as you acquire more of it, preference for a variety of goods
This intuition that consumers prefer variety leads us to an indifference curve that is strictly convex.
Utility
economic term referring to the total satisfaction received from consuming a good or service
In economic terms, they are trying to maximize total utility, or satisfaction, given their budget constraint.
Income Effect
The effect of a price change on a consumers purchasing powers, impact depends on whether good is normal or inferior
The income effect isolates the effect of the change in purchasing power, holding prices constant.
Substitution Effect
the effect of a price change on the relative price of goods, consumers generally substitute away from goods when prices rise
These effects are implicit in the income and substitution effects we will explore shortly.
Tangent
the slope are equal
By determining where these two curves are tangent to each other, we can determine where a consumer will consume at each price level.
These terms were extracted from Principles of Microeconomics by Dr. Emma Hutchinson, University of Victoria, eCampusOntario which is licensed under a Creative Commons Attribution 4.0 International License. Based on Principles of Microeconomics by OpenStax, licensed under CC BY 4.0.