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ECON-2302 Unit 3 Lecture Notes
Prin Micro Eco (Austin Community College District)
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Budget Constraints
- Has 3 variables: income, and two goods (two prices for those goods).
- Budget constraint: all the combinations, or bundles, of two goods a person can
purchase, given a certain money income and prices for the two goods.
- The absolute value of the budget constraint represents the relative prices of the two goods
(Px/Py).
- If any of the three variables changes (two prices and income) the budget constraint
changes as well.
- Changes in price/quantity change the slope of the budget constraint.
- Change in income will change the position of the budget constraint but the slope
of the line remains constant.
Indifference Curves
- Indifference set: a group of bundles of two goods that give an individual equal total
utility.
- Indifference curve: the curve that represents an indifference set and that shows all the
bundles of two goods giving an individual equal total utility.
Characteristics of Indifference Curves:
1. Downward sloping from left to right, meaning that consumers always prefer more of a
good to less.
2. Convex to the origin, meaning that the curve becomes flatter as it moves away from the
origin. The more of one good an individual has the more units they will give up to get an
additional unit of another good; the less of one good an individual has, the fewer units
they will give up to get an additional unit of another good.
a. Marginal rate of substitution: the absolute value of the slope of the indifference
curve; represents the marginal utility of the good on the horizontal axis to the
marginal utility of the good on the vertical axis. The amount of one good an
individual is willing to give up to obtain an additional unit of another good and
maintain equal total utility.
3. Indifference curves that are farther from the origin are preferred because they represent
larger bundles of goods and more total utility.
4. Indifference curves do not intersect because individuals’ preferences exhibit transitivity,
the principle whereby if A is preferred to B, and B is preferred to C, then A is preferred to
C.
- Consumer equilibrium: the point at which the slope of the budget constraint is equal to
the slope of an indifference curve.
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