Introduction to Indifference Curves and Budget Lines Economics | Economicsfun | YouTubeToText
YouTube Transcript: Introduction to Indifference Curves and Budget Lines Economics
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in this podcast I'm going to talk about consumer
consumer
Theory again consumer theory is really
all about constrain
buying I'm going to introduce two topics
lines and a difference curve looks
something like
this and we plot quantity of good y on
the Y
a couple things we just need to be aware
of when we talk about consumer Theory
and one is the idea of transitive
preferences which means that if I prefer
chicken to
beans and I prefer beef to
chicken I prefer beef to beans one thing
in economics we have a hard time doing
is is actually putting numbers to things
I can say I prefer something more to
another thing I can say I prefer chicken
more than beans but it's hard to put an
that we say that more is better but
there's also the law of diminishing
marginal returns which
steak I enjoy it less with each bite of
a steak I take I enjoy the Stak less and less
we often talk about utility and by
utility I mean
mean
happiness and
satisfaction this equation is read as
utility is equal to the function of X and
and
Y utility is a function of consumption
of two products X and
Y in this case X will be
potatoes and Y will be steak I've always
had a hard time just talking about
products X and
utility so imagine you have a giant
steak a friend of yours has a giant
trade how do you trade if you have a lot
of steak then you will give up steak to
just to be clear this represents more
potato if I have a lot of steak then I'm
willing to give up steak to get some potato
potato
in fact I'm willing to give up in this
scenario I'm willing to give up a lot of
potato so in this case obviously I'm
giving up more steak and getting a
little bit of
potato on the other
hand if I don't have very much steak and
I'm down here at the lower part of the
curve then I'm willing to give up a
little bit of steak but I expect to get
potato as you move down the um curve
notice that you actually conserve or you
you can serve the the thing you have the least
of so again on good y we have steak on X
is potato and we look at slopes of
lines and that's what measures the
trade slope we call the marginal rate of
substitution it's a change in product y
divided by the change in product X which
is the slope of the line is in this case
it's the change in a quantity consumed
of stake divided by the change in
difference curves are negatively sloped
so your relationship trade between two
potatoes my budget curve it constrains
my consumption if I don't have a budget
I can consume as much as I
want so $5 per pound of potatoes let's
make that assumption let's make
assumption that is $10 per pound for
steak and my income is
$11,000 my equation looks something like
this $5 time the quantity of potatoes I
consume and $10 times the quantity of
steak I consume and all that adds up to
stake then I cross out that amount and I
have $10 times the amount of steak which
on the other hand what if I spend all my
potatoes look something like this and I
potatoes lot of
potatoes so we can plot this line if I
spend all on steak it's it's uh 100
steak all on potatoes is 200 potatoes I
can easily calculate the slope of the
one2 the equation of my budget line
Looks something like
x times the quantity of X
X
plus the price of
y m we use M uh instead of
I so we have uh income is equal to price
of x * the quantity of X plus the price
of y * the quantity of Y and now we're
y so we subtract uh the price of x * the
Quant X from both sides of the equation
which gives
us uh income minus the price of x * the
quantity of X on the left hand side and
price of Y times the quantity of Y on
the right hand
side we divide both sides by the price
of Y to isolate
y which gives us an equation like that
and eventually we
here again again price of x times the
quantity of X plus the price of y *
income now when we plot our uh equation
in the budget uh line or budget curve
this is the way our equation works the
slope of the line is the ratio of the
two prices and remember that the uh the
uh price of the goods we're looking at
and the price the slope should equal 1/2
before the slope of the line is the
ratio of the
prices the slope changes the if the price
changes so now what happens if the price
of potatoes fall
what we see is it moves like
that that means you can consume more
potatoes that's it rotates around that
potatoes what happens if the price of potatoes
potatoes
rise you see that you can buy less
potatoes and you pivot the other
what happens if the price stake changes
what we see is as the price State goes
stake that's if the price of stake goes
down on the other hand if the price of
stake goes
St now the next question I have is what
what happens if income changes in this
case if income goes
up the entire budget line shifts out
everything income goes down you can buy
everything so you see an entire shift at
income changes entire budget line shifts
income goes up budget line shifts
outward income goes down budget line shifts
inward so in the end we have constrained
consumption and we're going to draw a
lot of indifference curves that's called
a indifference map and we're going to
have a budget line and we're going to
look at what happens when we combine
these two together in our next class but
the key is going to be the slope of the
the indifference curve is going to equal
the slope of the budget line that's
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