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00:00:00,730 --> 00:00:03,470
So let's just review what
we've seen with budget lines.

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Let's say I'm
making $20 a month.

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00:00:05,840 --> 00:00:08,870
So my income is $20 per month.

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00:00:08,870 --> 00:00:09,825
Let's say per month.

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00:00:12,350 --> 00:00:18,290
The price of chocolate
is $1 per bar.

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00:00:18,290 --> 00:00:23,730
And the price of
fruit is $2 per pound.

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00:00:23,730 --> 00:00:25,420
And we've already
done this before,

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00:00:25,420 --> 00:00:27,750
but I'll just redraw
a budget line.

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00:00:27,750 --> 00:00:31,050
So this axis, let's say this
is the quantity of chocolate.

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I could have picked
it either way.

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00:00:32,820 --> 00:00:36,170
And that is the
quantity of fruit.

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00:00:39,930 --> 00:00:41,810
If I spend all my
money on chocolate,

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I could buy 20 bars
of chocolate a month.

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00:00:44,550 --> 00:00:45,600
So that is 20.

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00:00:45,600 --> 00:00:47,310
This is 10 right over here.

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00:00:47,310 --> 00:00:49,740
At these prices, if I
spent all my money on fruit

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00:00:49,740 --> 00:00:51,950
I could buy 10 pounds per month.

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00:00:51,950 --> 00:00:53,420
So this is 10.

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00:00:53,420 --> 00:00:54,720
So that's 10 pounds per month.

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00:00:54,720 --> 00:00:56,010
That would be 20.

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00:00:56,010 --> 00:00:58,245
And so I have a budget
line that looks like this.

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00:01:01,030 --> 00:01:04,286
And the equation of this budget
line is going to be-- well,

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I could write it like this.

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My budget, 20, is going
to be equal to the price

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00:01:09,340 --> 00:01:13,430
of chocolate, which is 1, times
the quantity of chocolate.

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00:01:13,430 --> 00:01:15,810
So this is 1 times the
quantity of chocolate,

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00:01:15,810 --> 00:01:18,670
plus the price of
fruit, which is

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2 times the quantity of fruit.

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And if I want to
write this explicitly

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00:01:25,100 --> 00:01:27,140
in terms of my
quantity of chocolate,

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since I put that
on my vertical axis

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and that tends to be
the more dependent axis,

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I can just subtract 2
times the quantity of fruit

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00:01:33,540 --> 00:01:34,480
from both sides.

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00:01:34,480 --> 00:01:35,700
And I can flip them.

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And I get my
quantity of chocolate

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is equal to 20 minus 2
times my quantity of fruit.

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And I get this budget
line right over there.

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00:01:44,610 --> 00:01:47,450
We've also looked at the idea
of an indifference curve.

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So for example,
let's say I'm sitting

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00:01:49,140 --> 00:01:51,390
at some point on my
budget line where

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I have-- let's say I am
consuming 18 bars of chocolate

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and 1 pound of fruit.

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00:01:57,060 --> 00:01:58,770
18-- and you can
verify that make sense,

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00:01:58,770 --> 00:02:01,170
it's going to be $18
plus $2, which is $20.

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00:02:01,170 --> 00:02:05,480
So let's say I'm at this
point on my budget line.

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00:02:05,480 --> 00:02:08,960
18 bars of chocolate,
so this is in bars,

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00:02:08,960 --> 00:02:11,170
and 1 pound of fruit per month.

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00:02:11,170 --> 00:02:12,240
So that is 1.

50
00:02:12,240 --> 00:02:14,820
And this is in pounds.

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00:02:14,820 --> 00:02:19,686
And this is chocolate, and
this is fruit right over here.

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00:02:19,686 --> 00:02:22,060
Well, we know we have this
idea of an indifference curve.

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00:02:22,060 --> 00:02:24,380
There's different combinations
of chocolate and fruit

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to which we are
indifferent, to which

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00:02:25,921 --> 00:02:28,960
we would get the same
exact total utility.

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00:02:28,960 --> 00:02:31,140
And so we can plot
all of those points.

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00:02:31,140 --> 00:02:31,994
I'll do it in white.

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00:02:31,994 --> 00:02:33,410
It could look
something like this.

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00:02:33,410 --> 00:02:36,160
I'll do it as a dotted line, it
makes it a little bit easier.

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00:02:36,160 --> 00:02:37,800
So let me draw it like this.

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00:02:37,800 --> 00:02:41,160
So let's say I'm
indifferent between any

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of these points, any of those
points right over there.

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Let me draw it a
little bit better.

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00:02:45,770 --> 00:02:49,710
So between any of these
points right over there.

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So for example, I could
have 18 bars of chocolate

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and 1 pound of fruit,
or I could have--

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00:02:57,900 --> 00:03:00,420
let's say that is
4 bars of chocolate

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00:03:00,420 --> 00:03:05,620
and roughly 8 pounds of fruit.

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00:03:05,620 --> 00:03:06,550
I'm indifferent.

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00:03:06,550 --> 00:03:09,500
I get the same
exact total utility.

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Now, am I maximizing
my total utility

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00:03:12,420 --> 00:03:14,410
at either of those points?

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Well, we've already
seen that anything

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00:03:16,370 --> 00:03:18,200
to the top right
of our indifference

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00:03:18,200 --> 00:03:20,870
curve of this white curve right
over here-- let me label this.

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This is our indifference curve.

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Everything to the top right
of our indifference curve

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is preferable.

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We're going to get
more total utility.

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So let me color that in.

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So everything to the top right
of our indifference curve

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is going to be preferable.

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So all of these other
points on our budget

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00:03:37,730 --> 00:03:39,604
line, even a few points
below or budget line,

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00:03:39,604 --> 00:03:42,660
where we would actually
save money, are preferable.

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So either of these
points are not

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going to maximize
our total utility.

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00:03:47,550 --> 00:03:50,280
We can maximize or total utility
at all of these other points

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00:03:50,280 --> 00:03:52,570
in between, along
our budget line.

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00:03:52,570 --> 00:03:55,140
So to actually maximize
our total utility

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00:03:55,140 --> 00:03:58,300
what we want to do is find
a point on our budget line

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00:03:58,300 --> 00:04:03,863
that is just tangent, that
exactly touches at exactly one

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00:04:03,863 --> 00:04:05,820
point one of our
indifference curves.

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00:04:05,820 --> 00:04:07,560
We could have an infinite
number of indifference curves.

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00:04:07,560 --> 00:04:08,640
There could be another
indifference curve

96
00:04:08,640 --> 00:04:09,510
that looks like that.

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00:04:09,510 --> 00:04:10,450
There could be another
indifferent curve

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00:04:10,450 --> 00:04:11,500
that looks like that.

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00:04:11,500 --> 00:04:13,958
All that says is that we are
indifferent between any points

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00:04:13,958 --> 00:04:14,860
on this curve.

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00:04:14,860 --> 00:04:18,260
And so there is an indifference
curve that touches exactly

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00:04:18,260 --> 00:04:21,792
this budget line, or exactly
touches the line at one point.

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00:04:21,792 --> 00:04:23,500
And so I might have
an indifference curve

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00:04:23,500 --> 00:04:25,530
that looks like this.

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00:04:25,530 --> 00:04:29,230
Let me do this in a
vibrant color, in magenta.

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00:04:29,230 --> 00:04:32,610
So I could have an indifference
curve that looks like this.

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00:04:32,610 --> 00:04:36,280
And because it's tangent, it
touches at exactly one point.

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00:04:36,280 --> 00:04:38,410
And also the slope of
my indifference curve,

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00:04:38,410 --> 00:04:40,118
which we've learned
was the marginal rate

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of substitution, is the exact
same as the slope of our budget

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00:04:45,620 --> 00:04:47,320
line right over there,
which we learned

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00:04:47,320 --> 00:04:49,440
earlier was the relative price.

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So this right about here
is the optimal allocation

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on our budget line.

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00:04:55,780 --> 00:04:57,260
That right here is optimal.

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00:04:57,260 --> 00:04:59,120
And how do we know
it is optimal?

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Well, there is no other
point on the budget line

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that is to the top right.

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In fact, every other
point on our budget line

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00:05:07,340 --> 00:05:10,200
is to the bottom left of
this indifference curve.

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So every other point on our
budget line is not preferable.

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00:05:14,740 --> 00:05:18,710
So remember, everything
below an indifference curve--

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00:05:18,710 --> 00:05:19,835
so all of this shaded area.

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00:05:19,835 --> 00:05:21,460
Let me actually do
it in another color.

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00:05:21,460 --> 00:05:23,380
Because indifference
curve, we are different.

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But everything below an
indifference curve, so all

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of this area in green,
is not preferable.

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And every other point
on the budget line

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00:05:31,480 --> 00:05:35,090
is not preferable to that
point right over there.

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00:05:35,090 --> 00:05:37,510
Because that's the only point--
or I guess you could say,

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every other point
on our budget line

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is not preferable to the points
on the indifference curve.

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00:05:43,270 --> 00:05:46,260
So they're also not preferable
to that point right over there

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which actually is on
the indifference curve.

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00:05:49,570 --> 00:05:51,880
Now, let's think
about what happens.

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Let's think about what
happens if the price of fruit

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were to go down.

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00:05:56,480 --> 00:06:04,790
So the price of fruit were to
go from $2 to $1 per pound.

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00:06:04,790 --> 00:06:07,610
So if the price of fruit
went from $2 to $1, then

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00:06:07,610 --> 00:06:09,790
our actual budget line
will look different.

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00:06:09,790 --> 00:06:11,362
Our new budget line.

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00:06:11,362 --> 00:06:13,070
I'll do it in blue,
would look like this.

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If we spent all our
money on chocolate,

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we could buy 20 bars.

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00:06:15,280 --> 00:06:18,040
If we spent all of our money
on fruit at the new price,

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00:06:18,040 --> 00:06:20,460
we could buy 20 pounds of fruit.

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So our new budget line would
look something like that.

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00:06:28,090 --> 00:06:29,840
So that is our new budget line.

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00:06:35,630 --> 00:06:38,210
So now what would be
the optimal allocation

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00:06:38,210 --> 00:06:40,990
of our dollars or the best
combination that we would buy?

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00:06:40,990 --> 00:06:43,270
Well, we would do the
exact same exercise.

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00:06:43,270 --> 00:06:46,030
We would, assuming
that we had data

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00:06:46,030 --> 00:06:48,282
on all of these
indifference curves,

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00:06:48,282 --> 00:06:49,990
we would find the
indifference curve that

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00:06:49,990 --> 00:06:53,520
is exactly tangent to
our new budget line.

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00:06:53,520 --> 00:06:56,910
So let's say that this
point right over here

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00:06:56,910 --> 00:07:00,830
is exactly tangent to
another indifference curve.

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So just like that.

159
00:07:01,980 --> 00:07:05,270
So there's another indifference
curve that looks like that.

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00:07:05,270 --> 00:07:07,180
Let me draw it a
little bit neater.

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00:07:07,180 --> 00:07:10,910
So it looks something like that.

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00:07:10,910 --> 00:07:13,890
And so based on how the price--
if we assume we have access

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00:07:13,890 --> 00:07:16,980
to these many, many, many,
many, many indifference curves,

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00:07:16,980 --> 00:07:21,110
we can now see based
on, all else equal,

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00:07:21,110 --> 00:07:24,090
how a change in
the price of fruit

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00:07:24,090 --> 00:07:26,750
changed the quantity
of fruit we demanded.

167
00:07:26,750 --> 00:07:29,890
Because now our optimal spent
is this point on our new budget

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00:07:29,890 --> 00:07:34,540
line which looks like it's
about, well, give or take,

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00:07:34,540 --> 00:07:36,810
about 10 pounds of fruit.

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00:07:36,810 --> 00:07:39,640
So all of a sudden,
when we were-- so let's

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00:07:39,640 --> 00:07:41,060
think about just the fruit.

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00:07:41,060 --> 00:07:42,560
Everything else
we're holding equal.

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00:07:42,560 --> 00:07:47,030
So just the fruit, let's
do, when the price was $2,

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00:07:47,030 --> 00:07:50,600
the quantity demanded
was 8 pounds.

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00:07:50,600 --> 00:07:52,520
And now when the price
is $1, the quantity

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00:07:52,520 --> 00:07:54,205
demanded is 10 pounds.

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00:07:54,205 --> 00:07:55,580
And so what we're
actually doing,

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00:07:55,580 --> 00:07:58,530
and once again, we're kind of
looking at the exact same ideas

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00:07:58,530 --> 00:07:59,650
from different directions.

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00:07:59,650 --> 00:08:03,160
Before we looked at it in terms
of marginal utility per dollar

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00:08:03,160 --> 00:08:05,130
and we thought about
how you maximize it.

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00:08:05,130 --> 00:08:07,190
And we were able to
change the prices

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00:08:07,190 --> 00:08:09,539
and then figure out and derive
a demand curve from that.

184
00:08:09,539 --> 00:08:12,080
Here we're just looking at it
from a slightly different lens,

185
00:08:12,080 --> 00:08:14,860
but they really are
all of the same ideas.

186
00:08:14,860 --> 00:08:17,280
But by-- assuming
if we had access

187
00:08:17,280 --> 00:08:18,870
to a bunch of
indifference curves,

188
00:08:18,870 --> 00:08:22,880
we can see how a change in
price changes our budget line.

189
00:08:22,880 --> 00:08:25,610
And how that would change
the optimal quantity

190
00:08:25,610 --> 00:08:28,244
we would want of
a given product.

191
00:08:28,244 --> 00:08:29,910
So for example, we
could keep doing this

192
00:08:29,910 --> 00:08:32,429
and we could plot
our new demand curve.

193
00:08:32,429 --> 00:08:34,220
So I could do a demand
curve now for fruit.

194
00:08:34,220 --> 00:08:36,730
At least I have two points
on that demand curve.

195
00:08:36,730 --> 00:08:39,010
So if this is the
price of fruit and this

196
00:08:39,010 --> 00:08:42,872
is the quantity demanded of
fruit, when the price is $2,

197
00:08:42,872 --> 00:08:44,400
the quantity demanded is 8.

198
00:08:47,620 --> 00:08:49,000
And when the price
is-- actually,

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00:08:49,000 --> 00:08:50,610
let me do it a
little bit different.

200
00:08:50,610 --> 00:08:53,820
When the price is $2--
these aren't to scale--

201
00:08:53,820 --> 00:08:56,905
the quantity demanded is 8.

202
00:08:56,905 --> 00:08:58,687
Actually let me
do it here-- is 8.

203
00:08:58,687 --> 00:08:59,770
And these aren't to scale.

204
00:08:59,770 --> 00:09:03,710
But when the price is $1,
the quantity demanded is 10.

205
00:09:03,710 --> 00:09:06,625
So $2, 8, the quantity
demanded is 10.

206
00:09:09,140 --> 00:09:11,570
And so our demand curve,
these are two points on it.

207
00:09:11,570 --> 00:09:14,010
But we could keep changing
it up assuming we had access

208
00:09:14,010 --> 00:09:15,630
to a bunch of
indifference curves.

209
00:09:15,630 --> 00:09:18,150
We could keep changing
it up and eventually plot

210
00:09:18,150 --> 00:09:23,640
our demand curve, that might
look something like that.