optimum.
The point at which this indifference curve and the budget constraint touch
optimum, the slope of the _____ EQUALS the slope of the ___________.
- We say that the indifference curve is ______to the budget constraint.
indifference curve
budget constraint
TANGENT
optimum at which his marginal
rate of substitution _______ this relative price
equals
- relative price is the rate at which
the MARKET is willing to trade one good for the other. - MRS is the rate at which the CONSUMER is willing to trade one good for the other.
normal good
a good for which an increase in income raises the quantity demanded
inferior good
a good for which an increase in income
reduces the quantity demanded
a FALL in the price of ONE good ….
a INCREASE in price of one good…
an increase in INCOME…
Pivots the budget constraint OUTWARDS.
Pivots the budget constraint INWARDS.
shifts d budget line OUTWARDS
The income effect is the
the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
(Buy more/less of BOTH things)
substitution effect
the change in consumption that results when a price change moves the consumer ALONG a given indifference curve.
(buy more of one thing; and less of d other)
Giffen good
a good for which an increase in the price raises the quantity demanded
wage & labor supply: budget constrain shows a person’s tradeoff between ______&_______
substitution effect-
income effect-
consumption & leisure
a higher wage makes leisure more expensive. (work more; less leisure)
a higher wage, can afford more of both “goods” (less work; more leisure)
substitution effect induces Sam to consume more when old and less when young. In other words, the substitution effect induces Sam to save more.
substitution of interest rates
when interest rates increase
If the income effect is greater than the substitution effect, Sam saves _____.
less
