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OU ECON 1123 - Changes in Income and Relative Prices

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ECON 1123 1st Edition Lecture 7 Outline From Previous Lecture (Lecture 6)I. Consumer Choice: The Essence of the ProblemII. Subjective Consumer Preferences: Indifference SetsIII. Objective Consumer Circumstances: The Budget ConstraintOutline Lecture 7I. Reconciling Subjective Preferences and objective circumstances: Individual Utility maximizationII. Changes in IncomeIII. Changes in relative pricesLecture 7 NotesI. Reconciling Subjective Preferences and objective circumstances: Individual Utility maximizationThis will be reconciled at the equilibrium point where the indifference curve becomes tangent to the budget constraintTechnical notes:-Slope of the indifference curve is the marginal rate of substitution (MRS) change in good A/change in good B-Slope of the budget constraint is called the relative price ration. Price of Good A/ Price of Good B-Point of tangency MRS (change in good A/ change in good b)= relative price ratio=(price of good A/ Price of good B)II. Changes in IncomeChanges in income will cause parallel shifts in the budget constraint. It will shift to the right if the income increases and to the left if the income decreases. -Increases in income increase goods demanded-Normal goods when income increases the quantities demanded of normal (superior) goods increases. (As opposed to inferior goods) Example: off-brand These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.cheerios versus regular cheerios… If your income increases you will buy normal cheerios instead of the off brandIII. Changes in relative pricesChanges in relative prices pivot or rotate the budget constraint. This happens if the price of one good stays the same and the price of another good


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