Indifference Curves And Budget Lines
Economics notes
Indifference Curves And Budget Lines
➡️ Marginal utility theory assumes that consumers are rational and will always make decisions that maximize their utility. However, this is not always the case, as people may make decisions based on emotions or other factors.
➡️ The theory also assumes that the utility of a good is independent of the amount of money spent on it. This is not always true, as people may be willing to pay more for a good if they perceive it to be of higher quality.
➡️ The theory also assumes that the utility of a good is constant over time. This is not always the case, as people may find that the utility of a good decreases over time due to changes in tastes or preferences.
What is the relationship between indifference curves and budget lines?
Indifference curves and budget lines are both graphical representations of consumer preferences and spending behavior. Indifference curves show the combinations of two goods that a consumer is indifferent between, while budget lines show the combinations of two goods that a consumer can afford given their income and the prices of the goods. The budget line is determined by the consumer's income and the prices of the goods, while the indifference curves are determined by the consumer's preferences. The budget line and the indifference curves intersect at the point where the consumer's preferences and spending power are in equilibrium.
How do changes in income affect the budget line?
Changes in income will affect the budget line by shifting it either up or down. An increase in income will shift the budget line up, while a decrease in income will shift the budget line down. This is because the budget line is determined by the consumer's income and the prices of the goods, so when the income changes, the budget line will shift accordingly.
How do changes in prices affect the budget line?
Changes in prices will affect the budget line by shifting it either left or right. An increase in the price of one good will shift the budget line to the left, while a decrease in the price of one good will shift the budget line to the right. This is because the budget line is determined by the consumer's income and the prices of the goods, so when the prices change, the budget line will shift accordingly.