ECON 251 1st Edition Lecture 11Outline of Last Lecture I. TermsII. TaxesIII. Extreme CasesIV. QuotasOutline of Current Lecture I. TermsII. Consumer ChoiceIII. General Budget LineIV. Changes in the Budget LineV. PreferencesCurrent LectureI. TermsBudget Line: a line that describes the limits to our consumption possibilities given income and pricesRelative Price: how much of good Y you lose to consume one more unit of good XMarginal Utility: additional utility (essentially happiness) a consumer gets from one additionalunit of consumptionLaw of Diminishing Utility: MU eventually declines as our consumption increasesII. Consumer ChoiceThe goal of a consumer: maximize “utility” given our budget constraint-preferences-budgetExample: hot chocolate (Qh) and doughnuts (Qd)Income = $20/dayPrice hot chocolate = $2 (Ph)Price doughnut = $1 (Pd)Expenditure(h) + expenditure(d) ≤ IncomeThese 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.Ph*Qh +Pd*Qd ≤ Income2Qh + Qd ≤ 202Qh + Qd = 20 Budget Line (you know you will spend all of the given money)(Qh = y-axis, Qd = x-axis)2Qh + Qd = 20Slope = -1/2 Qh = -1/2 Qd + 10III. General Budget Line (good X, good Y)Px*Qx + PyQy = incomeSlope-int form:Qy = (-Px/Py)*Qx + (income/Py)(Px/Py) = “relative price” of good xIV. Changes in Budget LineExample: income increase from $20 to $30*/// = gained consumption possibilitiesThe slope of the new budget line doesn’t change because the price of hot chocolate and doughnuts didn’t change.Example: Pd increase from $1 to $2 (income still $20)*//// = loss in consumption possibilitiesSlope of original = -1/2Slope of new = -1V. PreferencesQh U MU My/P(how youspendeachdolloar)Qd5 U MU(how youspendeachdollar)0 0 - - 0 0 -1 20 20 10 4,5 1 30 30 12 35 15 7.5 7,8 2 50 20 23 49 14 7 9,10 3 65 15 34 60 11 5.5 11,12 4 75 10 65 70 10 5 14,15 5 80 5 136 79 9 4.5 16,17 6 84 4 187 86 7 3.5 19,20 7 87 38 89 3 1.5 8 89 29 91 2 1 9 90 110 92 1 0.5 10 89 -1*U = increasing, but increasing at a slower rate as the quantity increasesMax utitlity = 86+84 = 170Marginal utility = ΔU/ΔQLaw of Diminishing UtilityMY/P = MU per dollarRule: (in general, good X, good Y)If (Mux/Px) ˃( MYy/Py)  increase in QyIf (Mux/Px) / (MUy/Py) and the fact that we’ve spentmaximum utilityconsumer equilibriumwhere it stops = sometimes just close, and not quite equalExample: trying to spend money on shoes or a shirtMUs (shoes) = 100 Ps = $50Mush (shirt) = 50 Psh = $10(Mush/Psh) = 5 ˃ (MUs/Ps) = 2start spending the money on shirts