PRODUCTION POSSIBILITIES CURVE / FRONTIER

● In Economics, we have to satisfy the unlimited needs and wants.

● In Reality, Economic wants are greater than Economic needs.
● So there are unlimited wants but we have limited resources (Land, Labor, Capital, and
Entrepreneurial Abilities)
● Because we have Economic Want at sinamahan pa ng Limited Resources which is
considered as the fundamental of economics. We have what we called the Production
Possibilities Curve.

What is the Production Possibilities Curve or Frontier?

● It is the graph that shows the varying combinations of two goods that an
economy can produce. Given that they have limited resources and Production
Possibilities Curve depicts what we call as Productive Efficiency.
● We have assumptions where in here there’s Full Employment, Productive Efficiency,
Fixed Resources, Fixed Technology, and only Two Goods or services na available sa
ating economy.
● It shows the concept of Opportunity cost or the long-term value of something that you
need to sacrifice in order to produce other goods.

What is Productive Efficiency?

● It is the minimum or yung pinakamababang/pinaka-least costly manner of
producing goods and services because we have limited resources.
● Produce less machines, the production of burgers increases.
● Points along the Production Possibilities Curve, we can say it is attainable at the same
time if the economy produces within these points, we can say that they are efficient
given that they have limited resources.
● If you are a Practical Economy, you will not produce in combination A and E because
an individual has no satisfaction today but has to wait for the future production to be
satisfied.
● In situations A and E, it is impossible because we cannot wait for it.
● In reality, individuals cannot wait for the future.
● In B, C, D, kapag nagproduce tayo ngayon meron ding magpoproduce bukas.
● In W, we can say that it is unattainable, hindi siya kayang i-produce because we have
limited resources.
● In Y, it is attainable but it is not efficient in producing goods and services kasi hindi
natin nagagamit ang ating mga resources na available.
● *MAGING EFFICIENT SA PAGPOPRODUCE NG GOODS AND SERVICES.
● Kapag dumadami yung available resources sa isang bansa, yung PPC will move to the
right (create new ppf, outward movement) kapag naman konti ang available resources
will move to the left (in ward movement yung ppc)

● We produce goods and services na available sa ating Market. Paano malalaman if we

have Allocative Efficiency?
What is the Law of Increasing Opportunity Cost?
● The more the economy produce of a particular good the greater the cost of additional
units of that goods due to the fact that the resources needed for its production
become increasing scarce therefore more costly.
● The more na nag poproduce ng mas maraming good A kakaunti yung resources para
kay good B.
● Yung pag-aalocatan ng mas maraming resources, mababawasan yung resources or
good A.

What is Allocative Efficiency?

● It is how will we distribute the goods and services, or resources to satisfy the needs
and wants of the individual.
● We have to satisfy the assumptions that the Marginal Cost is = to the Marginal
Benefit.
● The particular mix of goods and services most highly valued by society (minimum-cost
production assumed).

What is Marginal Cost?

● It is the additional cost incurred by the firm or incurred by the economy in producing
one more output. (discuss kapag inaral ang cost and production theory)

What is Marginal Benefit or Marginal Utility?

● It is an additional benefit that the consumer can get given that we will consume one
more unit.
● Kapag gumagastos tayo kailangan mayroong additional benefit na makukuha.
● If Marginal Cost = Marginal Benefit, magkakaroon ng Optimal Allocation.

● Marginal Cost increasing because it depicts the relationship of the amount of Burger
produced and the cost of producing one more burger. Kapag dinadamihan ang
pagpoproduce ng burgers mas dumadami rin ang cost. (upward sloping)

● (Downward sloping) Marginal Benefit depicts the inverse relationship of the cause
incurred by the economy producing one more burger and the output of Burger
produced. Habang dumadami yung pinoproduce na burgers, mas bumababa ang
Marginal Benefit/Utility/Satisfaction sa pagkonsumo ng burger. Kasi may tinatawag
na Law of Diminishing Marginal Utility na habang nag coconsume ng maraming
product, ang tendency ay nagsasawa ang consumer. (bumababa)

● Kapag nagkakaroon ng intersection between marginal cost and marginal benefit,

nagkakaroon ng Optical Allocation yung economy. Kung magpoproduce ng goods and
services na gusto natin productively efficient and allocatively efficient kailangang
magproduce lang ng 2 Burgers (7 machines).
● We can satisfy the assumptions that MB = MC which is Allocatively Efficient at the
same time the economy is also Productively Efficient.
 MARKET

What is Microeconomics?
● Branch of economics that deals with the individual entity such as households and firms.
● Determine how the individual makes choices and how these choices affect the market.
● We have the Market not the Economy.
● We have a circular flow, where there's an exchange of the resources and products or
goods and services that are produced by the producers.

● Consumers are the ones who will provide for the different economic resources.
● (factors of production: land, labor, capital, entrepreneurship) these factors will be used
by the Producers in producing goods and services. *Producers only produce goods
and services na tinatawag na Economic Good.
● Economic Good these are the goods and services that commands price; mga
produktong mayroon presyo.
● There is no such thing as Free Launch therefore whenever we use the different factors
of production we have to pay for it that's why we have different Income Payment.
● Once the producers produce goods or services it will sell its product to the consumer
and the consumers will pay the producers in the form of Expenses.
● Yung kikitain naman ng producer ay tinatawag na Revenue.

What is the reason behind those phenomena where the producers will not produce Free
Goods?
● Profit = TR (P x Quantity being produce by the producer) - TC
● Kapag Free Good = Negative Economic Profit (loss)
● They want to avoid incurring loss, kaya hindi sila nag poproduce ng Free Goods.

What is the Market?

 ● It is a mechanism which brings together the buyers and sellers wherein they have this
transaction upon an agreed price.
● As long as there's a buyer, there's a seller, there's a transaction that is the exchange of
goods and services.
● Kapag nagkaroon ng transaction there is an agreed price na tinatawag na
Equilibrium Price.
● Hindi need na may place, basta may buyer, sellers and transaction, there is an agreed
price, market na yon.

What is Demand?
● Refers to the quantity of goods and services that the buyer is willing and able to
purchase at various prices at any given period of time ceteris paribus. (all other things
constant or other things equal; all the factor that can affect the demand there are
assumed constant aside from the price)
● Focusing on the buyer and terms willing and capable.

What is Supply?
● Refers to the quantity of goods and services that the seller is willing and able to
supply or sell at various prices at any given period of time ceteris paribus. (all other
things constant or other things equal; all the factor that can affect the supply there
are assumed constant aside from the price)

What is Function?
● These are the mathematical expressions that show the relationship of the Price and
the Quantity Demanded or the price of the Quantity Supplies.

What is the Schedule?

● The table that shows the relationship of the price and the quantity; instead of
Demand and Supply Table we will use Demand and Supply Schedule.

What is Curve?
● Points that show the relationship of the Price and the Quantity.

What is Demand Function?

● Qd = a - b(P)
● Quantity Demanded = Coefficient - Slope of the Price (Price)
● In Example, -4 means Every peso increase in the price of the product, the Quantity
Demanded will be reduce in 4 units; which is kapag tumataas ang presyo ng bilihin
ang mga buyer ay konti lang ang bibilhin.
● 80, the maximum quantity of good; kung libre ang isang produkto kaya natin mag
demand hanggang 80 units
Whatis Supply Function?
● Qs = -a + b(P)
● Quantity Supplied = -Coefficient + Slope of the Price (Price)
● In Example, +5 means that per every peso increase in the Price of the product the
Quantity Supplied increase to 5 units; habang tumataas ang presyo ng produkto ang
mga producers ay will magproduce. Higher Prices = Higher Total Revenue, Higher
Economic Profit.
● -10 the producer will not produce if the price of the product is 0. In reality, it is
equivalent to 0.

DEMAND AND SUPPLY SCHEDULE:

DEMAND AND SUPPLY CURVE:

 ● As the Price of the product increases, the Quantity Demanded decreases.
● As the Price of the product decreases, the Quantity Demanded increases.
● There’s an inverse relationship between the Price and Quantity Demanded.

● As the Price of the product increases, the Quantity Supplied increases.

● As the Price of the product decreases, the Quantity Supplied decreases.
● There’s a direct relationship between the Price and Quantity Supplied. (upward
sloping).

Determinants that affect the Demand:

PRICES OF RELATED GOODS AND SERVICES

- Complementary Good (good and services that comes with a pair) the Price of Coffee
Increases, the Demand for Sugar Decreases. (Inverse relationship)
- Substitute Good (good and services na tinatawag na Alternative; ito yung binibili dahil
hindi natin mabili yung isa) the Prices of Other Good Increases, the Demand for the
Other Good Increases

OUTLOOK OR EXPECTATIONS ON THE FUTURE PRICES

- Changes in consumer expectations may shift demand. A newly formed expectation of

higher future prices may cause consumers to buy now in order to “beat” the anticipated
price rises, thus increasing current demand. (Direct Effect)

INCOME

- Normal Good (these are the goods and services we purchase because we have higher
purchasing power/capacity to buy those products) Income Increase, Normal Good
Increase
- Inferior Food (we bought because we have lower purchasing budget) Income Decrease,
Inferior Good Increase (inverse relationship)

NUMBER OF BUYERS

- An increase in the number of buyers in a market is likely to increase product demand;

a decrease in the number of buyers will probably decrease demand.

TASTES AND PREFERENCES

- Direct relationship, ang consumer mas gusto ang isang produkto iyon ang bibilhin niya.

SEASON

- Depends, natural disaster, pandemic, tataas ang demand for grocery, can goods, etc.
Determinants that affect the Supply:

RESOURCE PRICE OR COST OF PRODUCTION

- Refers to the Cost of Production with the use of Raw Material; Kapag tumataas ang
presyo ng Harina sa paggawa ng tinapay nakakaapekto ito sa Cost of Production.
Resource Price Increase, Supply Decrease.

TECHNOLOGY

- Use of the company or firms with different capital or yung Equipment Tools in
producing goods and services, dahil sa technology mapapabilis ang production.
Technology Increase, Supply Increase.

PRICES OF THE COMPETING GOODS

- Rival Goods, kapag tumataas ang price ng rival good (Inverse Effect) Rice Production
Increases, Corn Production Decreases

EXPECTATION TO FUTURE PRICES

- Changes in expectations about the future price of a product may affect the producer’s
current willingness to supply that product. It is difficult, however, to generalize about
how a new expectation of higher prices affects the present supply of a product.
- Hoarding kasi iniisip na tataas ang presyo sa mga susunod na panahon kaya
nagkakaroon ng Pagbaba ng Current Supply.

NUMBER OF SELLERS

- Changes in expectations about the future price of a product may affect the producer’s
current willingness to supply that product. It is difficult, however, to generalize about
how a new expectation of higher prices affects the present supply of a product. (Direct
Effect)

TAXES AND SUBSIDIES

- Taxes considered as a Cost of Production; kapag tumataas ang Taxes, bumababa ang
Supply.
- Subsidies ito yung mga ayuda ng government, kapag may ayuda encourage them to
produce more, nagkakaroon ng mataas na supply.
What is the Change in Quantity Demanded?

● It occurs when there is a change in the Price of the product itself. It is only a change
along the demand curve itself.

What is the Change in Demand?

● It occurs when there is a change in the Non-Price Determinants of the product.

● demand curve to the right (an increase in demand) or to the left (a decrease in
demand).

What is the Change in Quantity Supplied?

● It occurs when there is a change in the Price of the product itself. (Point A-B)

What is the Change in Supply?

● It occurs when there is a change in the Non-Price Determinants of the supply.

● supply curve to the right (an increase in supply) or to the left (a decrease in supply).
 MARKET EQUILIBRIUM

● all of the forces in the market are equal

● the seller's offered price is equal to the price that the buyer is willing to pay for a
certain quantity of goods.
● Qd = Qs

SHORTAGE AND SURPLUS - market imperfections

1. SHORTAGE
- occurs when Qd > Qs
- shortage below the equilibrium point.
- the market solution is provided by the buyers – they will bid up the price of a certain good
because they're the ones who need the good.

2. SURPLUS
- occurs when Qs > Qd
- it is above the equilibrium point.
- the market solution is given by the sellers – they will reduce the price of a particular product
so that they can make sales and avoid incurring losses and more costs.
Price Ceiling & Price Support
Laissez - Faire - an economic system where there is no government intervention.

Price Ceiling
● maximum legal price fixed by the government on consumer goods to avoid further
increase in price of goods.
● iniimpose ng government in times na need na nila mag-intervene.

Price Support
● iniimpose ng government sa agricultural
● minimum price set on producer's goods.
Minimum Wage

MINIMUM WAGE
● payment for labor
● Demand for labor represents the employer.
● supply for labor represents the employee
● it is above the equilibrium wage. if Wm increases, the demand decreases, supply
increases and surplus.
● surplus for labor occurs when the supply for it is greater than the demand.
● unemployment - if mag-iimpose ang government ng Wm, the higher the probability of
unemployment
● For employees, higher wage mean higher standards of living

Foreign exchange
Foreign exchange market
● the market where trading of foreign currencies occur
● universal currency is dollar
Appreciation of Peso
- Stronger ang domestic currency kaysa foreign
- Occurs if mataas ang foreign direct investment.

Export - expensive, decrease

Import - cheaper, increase

Depreciation of Peso
- domestic currency is weaker than foreign currencies
- occur if foreign investors pull out their investments from the country.

Export - cheaper, increase

Import - expensive, decrease
 ELASTICITY

● It is the degree of responsiveness of one variable due to the changes of another

variable.
● Referring to the slope of the Demand or Supply Curve. Ang susukatin dito ay
steepness or flatness ng Demand or Supply Curve.

Types of Elasticity
● Price Elasticity of Demand - measures the degree of responsiveness of Qd due to the
changes in Price of the product itself, ceteris paribus.
● There is an assumption na hindi tayo tumatanggap ng negative numbers. Always
positive ang answer.

- Endpoint Formula: Q2 (current qd) - Q1 (previous or original qd) over Q1 all over P2
(current price) - P1 (previous or original price) over P1

● Types of Elasticity of Demand

- Relatively Elastic - consumers are responsive to the changes of price wherein

the % change in Qd > % change in Price of the Product itself. Kapag may
pagbabago sa price, magrereact agad si consumer. (Example: Luxury Products)
Elasticity demand > 1 (Reduce the Price of the Product - para mas ma-entice
ang mga consumers na magdemand ng product)

- Relatively Inelastic - consumers are unresponsive on the price of the product.

% change in Price of the Product itself > % change in Qd. (Example:
Necessities, Bigas)
Elasticity demand < 1 (Para tumaas ang TR, taasan lang ang Price - dahil
kahit itaas ang price bibili pa rin sila) Price x Quantity
 - Unitary - % change in Qd = % change in Price of the Product itself.
Elasticity demand = 1 (Example: candy)

- Perfectly Elastic - consumers are very responsive to the changes of Price. Agad
agad na nagreresponse kahit sa maliit na increase lang. (Example: Demand
Curve in purely competitive market, Price Takers) Elasticity demand = Infinity
(whole number na hindi alam ang dulo)

- Perfectly Inelastic - consumers are unresponsive at all of the changes in Price.

(Example: Kahit magkano bibili at bibili pa rin, Product na matter of life or
death) Elasticity demand = 0 (walang makikitang slope)

● Price Elasticity of Supply - measures the degree of responsiveness of Qs due to the

changes in Price of the goods itself other things constant, ceteris paribus.
● Focusing on the Supply side or Producers side of the market.
● Never magkakaroon ng negative sa supply kasi violation ito sa Law of Supply. Direct
or Positive relationship between Price and Qs.
● Endpoint Formula: Q2s (current qs) - Qs (previous or original qs) over Qs all over P2
(current price) - P1 (previous or original price) over P1

● Types of Elasticity of Supply

- Relatively Elastic Supply - Elasticity Supply > 1
- Relatively Inelastic Supply - Elasticity Supply < 1
- Unitary Supply - Elasticity Supply = 1
- Perfectly Elastic Supply - Elasticity Supply = Infinity
- Perfectly Inelastic Supply - Elasticity Supply = 0
● Income Elasticity of Demand- measures the degree of responsiveness of Qd due to
the changes in Consumer’s Income other things constant, ceteris paribus.
● Kapag positive ang sagot (normal + ); Kapag negative ang sagot (inferior -)
● Y = CONSUMER’S INCOME
● Endpoint Formula: Q2 (current qd) - Q1 (previous or original qd) over Q1 all over Y2
(current income) - Y1 (previous or original income) over Y1

● Cross Price Elasticity of Demand - measures the degree of responsiveness of Qd (of

product X) due to the changes in the Price of Related Goods (Product Y) other
things constant, ceteris paribus.
● We will assume that we have 2 goods, the Product X and Y.
● Kapag positive ang sagot (substitute +); Kapag negative ang sagot (complementary
-); Kapag 0 and sagot (independent good)
● Endpoint Formula: Q2x (current product x) - Qx (previous or original product x) over
Qx all over P2y (current price product y) - Py (previous or original price product y)
over Py
 CONSUMER BEHAVIOR
- Study to know how consumers buy goods and services to satisfy their needs and wants.

Law of Diminishing Marginal Utility

● Indicates that gains in satisfaction become smaller as successive units of a specific
product are consumed.
● It provides a simple rationale for the law of demand.
● Theory of Consumer Behavior - The idea of this also explains how consumers allocate
their money incomes among the many goods and services available for purchase.
● The principle that as a consumer increases the consumption of a good or service,
the marginal utility obtained from each additional unit of the good or service
decreases. CONSUMERS CONSUMES MORE AND MORE GOODS, EXTRA
SATISFACTION DECREASES.

Utility
● Utility is want-satisfying power.
● The utility of a good or service is the satisfaction or pleasure one gets from
consuming it.
● The ability of goods and services to satisfy consumer wants is the basis for consumer
behavior.
● Utility is the benefit or satisfaction a person receives from consuming a good or a
service.

3 characteristics of the concept above:

● “Utility” and “usefulness” are not synonymous.
● Utility is subjective. The utility of a specific product may vary widely from person
to person. A lifted pickup truck may have great utility to someone who drives off-road
but little utility to someone unable or unwilling to climb into the rig. Eyeglasses have
tremendous utility to someone who has poor eyesight but no utility to a person with
20-20 vision.
● Utility is difficult to quantify. But for purposes of illustration we assume that
people can measure satisfaction with units called utils (units of utility).

BASIC ASSUMPTION IN UTILITY THEORY

1. More is better - Consumers always prefer more to less of any good or service.
Economists refer to this as the nonsatiation principle.
2. Preferences are complete - Consumers are able to compare and rank the benefits
tied to consumption. Indifference is equivalence in the eyes of the consumer; same
satisfaction.
3. Preferences are transitive - Consumers are able to rank order the desirability of
various goods and services.
Ordinal Utility (Indifference Theory) - Utility is not measurable but can be only compared
and ranked products (or combinations of products) as to preference, without asking them to
specify the absolute amount of satisfaction provided by the product. People have different
tastes. Donut preferred, followed by Footlong, wag na lang.

Cardinal Utility - Satisfaction (utility) that can be measured via cardinal numbers (1, 2,
3…), with all the mathematical properties of those numbers such as addition, subtraction,
multiplication, and division being applicable. Eating 1 Stick-o gives me 5 utils.

Total Utility
● It is the total amount of satisfaction or pleasure a person derives from consuming
some specific quantity—for example, 10 units—of a good or service.

Marginal Utility
● It is the extra satisfaction a consumer realizes from an additional unit of a
product—for example, from the eleventh unit.
● The extra utility a consumer obtains from the consumption of 1 additional unit of a
good or service; equal to the change in total utility divided by the change in the
quantity consumed.
● Measures the added satisfaction derived from 1-unit increase in consumption of a
particular good or service, holding consumption of other goods and services constant.
● Alternatively, marginal utility is the change in total utility that results from the
consumption of 1 more unit of a product.

Marginal and Utility Demand

● The law of diminishing marginal utility explains why the demand curve for a given
product slopes downward. If successive units of a good yield smaller and smaller
amounts of marginal, or extra, utility, then the consumer will buy additional units of a
product only if its price falls.
● A downward-sloping demand curve can be derived by changing the price of one
product in the consumer-behavior model and noting the change in the
utility-maximizing quantity of that product demanded.
*THEORY OF CONSUMER BEHAVIOR
- The theory of consumer behavior assumes that, with limited income and a set of
product prices, consumers make rational choices on the basis of well-defined
preferences.

Consumer Choice and Budget Constraint

1. Rational Behavior - A rational consumer is a rational person who maximizes
satisfaction or minimizes expenses, who tries to use his or her money income to
derive the greatest amount of satisfaction, or utility, from it. Consumers want to get
“the most for their money” or, to maximize their total utility. Has to choose likes best.

2. Preferences - Each consumer has clear-cut preferences for certain of the goods and
services that are available in the market. Buyers also have a good idea of how much
marginal utility they will get from successive units of the various products they
might purchase.

3. Budget Constraint - At any point in time the consumer has a fixed, limited amount
of money income. Since each consumer supplies a finite amount of human and
property resources to society, he or she earns only limited income. Thus, every consumer
faces a budget constraint, even consumers who earn millions of dollars a year. Of
course, this budget limitation is more severe for a consumer with an average income
than for a consumer with an extraordinarily high income.
- The limit that the size of a consumer’s income (and the prices that must be paid
for goods and services) imposes on the ability of that consumer to obtain goods
and services.

4. Prices - Goods are scarce relative to the demand for them, so every good carries a
price tag. We assume that the price of each good is unaffected by the amount of it
that is bought by any particular person. After all, each person’s purchase is a tiny part
of total demand. Also, because the consumer has a limited number of dollars, he or
she cannot buy everything wanted. This point drives home the reality of scarcity to
each consumer.

Utility-Maximizing Rule
● To maximize satisfaction, the consumer should allocate his or her money income
so that the last money spent on each product yields the same amount of extra
(marginal) utility. A consumer maximizes utility by allocating income so that the
marginal utility per money spent is the same for every good purchased.
Consumer Equilibrium
● When the consumer has “balanced his or her margins” using utility-maximizing rule and
has no incentive to alter his or her expenditure pattern.
● In fact, any person who has achieved consumer equilibrium would be worse off—total
utility would decline—if there were any alteration in the bundle of goods purchased,
providing there is no change in taste, income, products, or prices.
● Same yung satisfaction, edi kung ano na lang yung mas mura.

Utility Maximization and Demand Curve

● Product price and quantity demanded are inversely related.

Income Effect (Income)

● It is the impact that a change in the price of a product has on a consumer’s real
income and consequently on the quantity demanded of that good. Inc. Income Dec.
Inferior and Inc. Normal.

Substitution Effect (PRICES OF RELATED GOODS AND SERVICES)

● It is the impact that a change in a product’s price has on its relative expensiveness and
consequently on the quantity demanded.
● By providing insights on the income effect and substitution effects of a price decline,
the utility-maximization model helps explain why demand curves are downsloping.
Increase in Income NFA to Jasmine Rice.

1. The law of diminishing marginal utility states that beyond a certain quantity, additional
units of a specific good will yield declining amounts of extra satisfaction to a consumer.

2. The utility-maximization model assumes that the typical consumer is rational and acts
on the basis of well-defined preferences. Because income is limited and goods have prices,
the consumer cannot purchase all the goods and services he or she might want. The consumer
therefore selects the attainable combination of goods that maximizes his or her utility or
satisfaction.
3. A consumer’s utility is maximized when income is allocated so that the last dollar spent on
each product purchased yields the same amount of extra satisfaction. Algebraically, the
utility-maximizing rule is fulfilled when MU of product A / Price of A = MU of product B /
Price of B and the consumer’s total income is spent.

4. The utility-maximizing rule and the demand curve are logically consistent. Because
marginal utility declines, a lower price is needed to induce the consumer to buy more of
a particular product.

5. The utility-maximization model illuminates the income and substitution effects of a

price change. The income effect implies that a decline in the price of a product increases
the consumer’s real income and enables the consumer to buy more of that product with a
fixed money income. The substitution effect implies that a lower price makes a product
relatively more attractive and therefore increases the consumer’s willingness to substitute it
for other products.

Indifference Curve - A curve showing the different combinations of two goods that yield the
same satisfaction or utility to a consumer.
- The model of consumer behavior that is based upon such ordinal utility rankings is
called Indifference Curve Analysis.
- Indifference Map - series of indifference curves

Budget Line - A line that shows the different combinations of two products a consumer can
purchase with a specific money income, given the products’ prices. Separates what is
affordable and not.

Marginal Rate of Substitution (MRS) - The rate at which a consumer is willing to substitute
one good for another (from a given combination of goods) and remain equally satisfied (have
the same total utility); equal to the slope of a consumer’s indifference curve at each point on
the curve.
- Good and Service is equivalent value you are willing to give.

1. The indifference curve approach to consumer behavior is based on the consumer’s budget
line and indifference curves.
2. The budget line shows all combinations of two products that the consumer can purchase,
given product prices and his or her money income.

3. A change in either product prices or money income moves the budget line.

4. An indifference curve shows all combinations of two products that will yield the same total
utility to a consumer. Indifference curves are downward-sloping and convex to the origin.

5. An indifference map consists of a number of indifference curves; the farther from the
origin, the higher the total utility associated with a curve.

6. The consumer is in equilibrium (utility is maximized) at the point on the budget line that
lies on the highest attainable indifference curve. At that point the budget line and indifference
curve are tangent.

7. Changing the price of one product shifts the budget line and determines a new equilibrium
point. A downsloping demand curve can be determined by plotting the price-quantity
combinations associated with two or more equilibrium points.