# Ch. 21 AP Microeconomics (The Theory of Consumer Choice)

## 12 terms · A bit technical, probably look up some of this and look at the graphs.

### Perfect Complements

Goods that a consumer is interested in consuming but only in fixed proportions; has L shaped(right angled) indifference curves. Like left shoes and right shoes.

### Perfect Substitutes

Two goods with straight line indifference curves. Like Nickels and dimes.

### Indifference Curve

A curve that shows consumption bundles that give the consumer the same level of satisfaction (utility). Are ALWAYS downward sloping, NEVER cross other ___________ _________s, and higher __________ _________s are ALWAYS preferred when compared to lower __________ __________s. Also they are always bowed inwards.

### Marginal Rate of substitution

The rate in which a consumer is willing to trade one good for another and stay on the same indifference curve. (MRS)

### Budget Constraint

The limit on the consumption bundles that a consumer can afford., the set of all bundles a consumer can purchase for given values of income and price (first point is buying all one product and the end point is all of the other product)

### Consumer Optimum

A choice of a set of goods and services that maximizes the level of satisfaction for each consumer, subject to limited income. The point where the budget constraint is tangent to the indifference curve. Is also where the marginal rate of substitution(MRS) = relative price.

### Normal Good

A good for which, other things equal, an increase in income leads to an increase in demand.

### inferior good

a good for which, other things equal, an increase in income leads to a decrease in demand

### income effect

The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.

### substitution effect

The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution.

### Giffen Good

A good for which an increase in the price raises the quantity demanded, usually an inferior good accounting for a large share of a consumers budget that has a positively sloped demand curve because the income effect of a price change out weighs the substitution effect. Important because it VIOLATES Law of Demand. Potatoes in 19th century.

### Interest Rate

Cost of borrowing money, expressed as a percentage of the amount borrowed per year.

### Flickr Creative Commons Images

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