Lecture Notes: Chapter 9 – Possibilities, Preferences, and Choices
Based on Microeconomics: Canada in the Global Environment (11th Edition)
Introduction
How do consumers make choices when faced with trade-offs between different goods and
services? Chapter 9 introduces the tools economists use to explain and predict consumer
behavior: the budget line, indifference curves, and the marginal rate of substitution. By
combining these graphical tools, we can see how consumers balance their income and
preferences to make optimal choices. This chapter also explains how changes in prices and
income affect consumer decisions and the shape of the budget constraint.
1. The Budget Line: Describing a Household’s Consumption Possibilities
Definition
A budget line shows all combinations of two goods a consumer can afford, given income and
prices. It represents the boundary of what is financially possible.
Budget Equation
Let:
P₁ = price of good 1
P₂ = price of good 2
M = total income
Q₁, Q₂ = quantities of goods 1 and 2
Rearranged, this is a linear equation that can be graphed.
Graph Description:
X-axis: Quantity of good 1 (e.g., movies)
Y-axis: Quantity of good 2 (e.g., meals)
The budget line slopes downward from left to right, representing the trade-off between
goods.
The slope = −P1/P2, or the relative price of good 1 in terms of good 2.
, Example:
You have $100 to spend. Movies cost $10 and meals cost $20.
Max movies: 10 (when no meals are bought)
Max meals: 5 (when no movies are bought)
Budget line connects these two points.
2. Changes in the Budget Line
Effect of a Change in Income
Increase in income shifts the budget line outward, parallel to the original line (you can
afford more of both goods).
Decrease in income shifts it inward, parallel to the original line.
Example:
If your income rises from $100 to $200, you can now afford up to 20 movies or 10 meals.
Effect of a Change in Price
If the price of one good rises, the budget line pivots inward around the intercept of the
other good (fewer units of the more expensive good can be bought).
If the price falls, the budget line pivots outward.
Example:
If the price of movies falls from $10 to $5, the x-intercept moves from 10 to 20 (you can buy
more movies), while the y-intercept (maximum meals) stays at 5.
3. Indifference Curves: Mapping Preferences
Definition
An indifference curve shows all combinations of two goods that give the consumer the same
level of satisfaction or utility.
Each point on an indifference curve represents a different bundle of goods that the consumer
views as equally desirable.
Properties of Indifference Curves
1. Downward Sloping:
Based on Microeconomics: Canada in the Global Environment (11th Edition)
Introduction
How do consumers make choices when faced with trade-offs between different goods and
services? Chapter 9 introduces the tools economists use to explain and predict consumer
behavior: the budget line, indifference curves, and the marginal rate of substitution. By
combining these graphical tools, we can see how consumers balance their income and
preferences to make optimal choices. This chapter also explains how changes in prices and
income affect consumer decisions and the shape of the budget constraint.
1. The Budget Line: Describing a Household’s Consumption Possibilities
Definition
A budget line shows all combinations of two goods a consumer can afford, given income and
prices. It represents the boundary of what is financially possible.
Budget Equation
Let:
P₁ = price of good 1
P₂ = price of good 2
M = total income
Q₁, Q₂ = quantities of goods 1 and 2
Rearranged, this is a linear equation that can be graphed.
Graph Description:
X-axis: Quantity of good 1 (e.g., movies)
Y-axis: Quantity of good 2 (e.g., meals)
The budget line slopes downward from left to right, representing the trade-off between
goods.
The slope = −P1/P2, or the relative price of good 1 in terms of good 2.
, Example:
You have $100 to spend. Movies cost $10 and meals cost $20.
Max movies: 10 (when no meals are bought)
Max meals: 5 (when no movies are bought)
Budget line connects these two points.
2. Changes in the Budget Line
Effect of a Change in Income
Increase in income shifts the budget line outward, parallel to the original line (you can
afford more of both goods).
Decrease in income shifts it inward, parallel to the original line.
Example:
If your income rises from $100 to $200, you can now afford up to 20 movies or 10 meals.
Effect of a Change in Price
If the price of one good rises, the budget line pivots inward around the intercept of the
other good (fewer units of the more expensive good can be bought).
If the price falls, the budget line pivots outward.
Example:
If the price of movies falls from $10 to $5, the x-intercept moves from 10 to 20 (you can buy
more movies), while the y-intercept (maximum meals) stays at 5.
3. Indifference Curves: Mapping Preferences
Definition
An indifference curve shows all combinations of two goods that give the consumer the same
level of satisfaction or utility.
Each point on an indifference curve represents a different bundle of goods that the consumer
views as equally desirable.
Properties of Indifference Curves
1. Downward Sloping:
