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Summary Econ 2014 Chapter 3
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Summary of 4 pages for the course Economics at SUN (Chapter 3)
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Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Economics 214 summary: Microeconomics
Chapter 3: Rational Consumer Choice
Budget line (BL):
Formula of the BL: Income = PxX + PyY where Px and Py are the prices of goods X and Y
Equation that represents the BL: –
Each intercept of the line shows how much of a good could be purchased if all one`s income was spend on
that good (real income i.t.o. the good)
The straight line between the two intercepts illustrates that the tradeoff between the goods is constant,
which is true if each consumer is a price taker in the market and can buy all she can afford at the constant
market price.
When income changes, the BL shifts parallel to the left when income decreases and parallel to the right
when income increases.
When the price of one of the goods changes, the intercept on the axis that measures that good changes and
as a result the slope of the budget line changes.
Indifference curve: curve representing all combinations of market baskets that provide a consumer with
the same level of satisfaction (utility).
Higher indifference curves (curves to the northeast) on the indifference map will have higher utility since
such baskets has more of at least one of the goods.
Assumptions about preferences:
1. Completeness: consumer can compare and rank all possible baskets.
2. Transitivity: if A is preferred to B and B is preferred to C, then A is also preferred to C.
3. Convexity: indifference curves are bowed inward, because we assume diminishing MRS holds.
4. More is better than less: consumer always prefer more of any good to less
Marginal Rate of Substitution (MRS): absolute slope of the indifference curve. Specifies at each point of
the indifference curve the rate at which the consumer is willing to give up good Y in exchange for more of
good X without losing utility.
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