Chapter 9

- When the price falls, there is a movement down along the demand curve, thus, an
increase in the quantity demanded.

- Price effect: effect of a change in the price of a good on the quantity of the good
consumed.
Income effect: effect of a change in income on buying plans.
Substitution effect: the effect of a change in price on quantity bought when the
consumer (hypothetically) remains indifferent between the original situation and the new
one.
When both income and the relative price of a good change so that the old choice is still
available, the consumer's best affordable choice changes.

- Budget equation: Income = PB.QB + PM.QM (P: price, Q: quantity)

- The slope of the budget line is the relative price of a book.

The slope of the indifference curve is the marginal rate of substitution.

- INDIFFERENCE CURVE:
An indifference curve is a line that shows combinations of goods among which a
consumer is indifferent. Indifference curves cannot intersect.
An indifference curve is bowed towards the origin because the more of good X that
you consume the less you are willing to give up of good y to get more of good x and
remain indifferent.
A preference map is a series of indifference curves. It shows that a person prefers
combinations of goods among which a consumer is indifferent; on higher indifference
curves to combinations on lower indifference curves.
As we move up along the indifference curve, increasing the consumption of Y and
decreasing the consumption of X, the slope of the indifference curve (aka the
marginal rate of substitution) increases.

- The marginal rate of substitution is the rate at which a person will give up more of
good Y(the good measured on the y-axis) to get more of good X (the good measured on
the x-axis) and at the same time remain on the same indifference curve.
The marginal rate of substitution is greater the steeper is the indifference curve at a
given point.
- Diminishing marginal rate of substitution is the general tendency for the marginal rate
of substitution to decrease as the consumer moves down along the indifference curve,
increasing consumption of the good measured on the x-axis and decreasing consumption
of the good measured along the y-axis.

- A complement is a good that is used in conjunction with another good.

Perfect complements are goods that cannot be substituted for each other at all. Their
indifference curves are L-shaped.
- When two goods are perfect substitutes, the indifference curves are straight lines and
their marginal rate of substitution is constant.

- Change of price of good x:

When the price of good A on the x-axis rises, the budge line rotates inward and moves to
a lower difference curve.
When the price of a good on the x-axis falls, the relative price of the good measured on
the x-axis falls and the budget line becomes less steep.

- A change in the relative price changes the opportunity cost of purchasing goods and
changes the slope of the budget line.
A change in real income shifts the budget line.
A decrease in income shift the budget line leftwards and shifts the demand curve
leftwards.

- NORMAL GOOD:
When the price of a normal good falls, there is a movement down along the demand
curve and an increase in the quantity demanded.
For a normal good, the income effect reinforces the substitution effect.