EC500: Micro - Lecture 2: The Budget Constraint

These flashcards cover essential concepts from the lecture on budget constraints and consumer theory.

What is the main objective of a consumer in economics?

To maximize his/her well-being.

What do budget constraints show in consumer theory?

How consumers are limited by their income.

Define consumption bundle.

A collection of one or more goods representing quantities consumed of each good.

What is the budget set?

The set of consumption bundles that are affordable at given prices and income.

What is an essential distinction to make when discussing budget constraints?

Choice variables (which can be chosen by the consumer) versus parameters (which cannot be chosen).

In the budget constraint formula, what does 'X' and 'Y' represent in the context of beer and tacos?

X represents the quantity of tacos and Y represents the quantity of beers.

What does the slope of the budget line indicate?

The rate at which one good must be given up to consume more of the other good.

How are prices set relative to a numeraire in budget constraints?

Prices are expressed relative to the price of the numeraire good which is set to 1.

What happens to the budget line when income increases?

The budget line shifts outward, allowing for more consumption.

How does a decrease in the price of a good affect the budget line?

The budget line rotates outward, allowing for increased consumption of that good.