0:00:00.730,0:00:03.470 So let's just review what[br]we've seen with budget lines. 0:00:03.470,0:00:05.840 Let's say I'm[br]making $20 a month. 0:00:05.840,0:00:08.870 So my income is $20 per month. 0:00:08.870,0:00:09.825 Let's say per month. 0:00:12.350,0:00:18.290 The price of chocolate[br]is $1 per bar. 0:00:18.290,0:00:23.730 And the price of[br]fruit is $2 per pound. 0:00:23.730,0:00:25.420 And we've already[br]done this before, 0:00:25.420,0:00:27.750 but I'll just redraw[br]a budget line. 0:00:27.750,0:00:31.050 So this axis, let's say this[br]is the quantity of chocolate. 0:00:31.050,0:00:32.820 I could have picked[br]it either way. 0:00:32.820,0:00:36.170 And that is the[br]quantity of fruit. 0:00:39.930,0:00:41.810 If I spend all my[br]money on chocolate, 0:00:41.810,0:00:44.550 I could buy 20 bars[br]of chocolate a month. 0:00:44.550,0:00:45.600 So that is 20. 0:00:45.600,0:00:47.310 This is 10 right over here. 0:00:47.310,0:00:49.740 At these prices, if I[br]spent all my money on fruit 0:00:49.740,0:00:51.950 I could buy 10 pounds per month. 0:00:51.950,0:00:53.420 So this is 10. 0:00:53.420,0:00:54.720 So that's 10 pounds per month. 0:00:54.720,0:00:56.010 That would be 20. 0:00:56.010,0:00:58.245 And so I have a budget[br]line that looks like this. 0:01:01.030,0:01:04.286 And the equation of this budget[br]line is going to be-- well, 0:01:04.286,0:01:05.410 I could write it like this. 0:01:05.410,0:01:09.340 My budget, 20, is going[br]to be equal to the price 0:01:09.340,0:01:13.430 of chocolate, which is 1, times[br]the quantity of chocolate. 0:01:13.430,0:01:15.810 So this is 1 times the[br]quantity of chocolate, 0:01:15.810,0:01:18.670 plus the price of[br]fruit, which is 0:01:18.670,0:01:23.517 2 times the quantity of fruit. 0:01:23.517,0:01:25.100 And if I want to[br]write this explicitly 0:01:25.100,0:01:27.140 in terms of my[br]quantity of chocolate, 0:01:27.140,0:01:28.680 since I put that[br]on my vertical axis 0:01:28.680,0:01:31.220 and that tends to be[br]the more dependent axis, 0:01:31.220,0:01:33.540 I can just subtract 2[br]times the quantity of fruit 0:01:33.540,0:01:34.480 from both sides. 0:01:34.480,0:01:35.700 And I can flip them. 0:01:35.700,0:01:37.590 And I get my[br]quantity of chocolate 0:01:37.590,0:01:42.300 is equal to 20 minus 2[br]times my quantity of fruit. 0:01:42.300,0:01:44.610 And I get this budget[br]line right over there. 0:01:44.610,0:01:47.450 We've also looked at the idea[br]of an indifference curve. 0:01:47.450,0:01:49.140 So for example,[br]let's say I'm sitting 0:01:49.140,0:01:51.390 at some point on my[br]budget line where 0:01:51.390,0:01:55.200 I have-- let's say I am[br]consuming 18 bars of chocolate 0:01:55.200,0:01:57.060 and 1 pound of fruit. 0:01:57.060,0:01:58.770 18-- and you can[br]verify that make sense, 0:01:58.770,0:02:01.170 it's going to be $18[br]plus $2, which is $20. 0:02:01.170,0:02:05.480 So let's say I'm at this[br]point on my budget line. 0:02:05.480,0:02:08.960 18 bars of chocolate,[br]so this is in bars, 0:02:08.960,0:02:11.170 and 1 pound of fruit per month. 0:02:11.170,0:02:12.240 So that is 1. 0:02:12.240,0:02:14.820 And this is in pounds. 0:02:14.820,0:02:19.686 And this is chocolate, and[br]this is fruit right over here. 0:02:19.686,0:02:22.060 Well, we know we have this[br]idea of an indifference curve. 0:02:22.060,0:02:24.380 There's different combinations[br]of chocolate and fruit 0:02:24.380,0:02:25.921 to which we are[br]indifferent, to which 0:02:25.921,0:02:28.960 we would get the same[br]exact total utility. 0:02:28.960,0:02:31.140 And so we can plot[br]all of those points. 0:02:31.140,0:02:31.994 I'll do it in white. 0:02:31.994,0:02:33.410 It could look[br]something like this. 0:02:33.410,0:02:36.160 I'll do it as a dotted line, it[br]makes it a little bit easier. 0:02:36.160,0:02:37.800 So let me draw it like this. 0:02:37.800,0:02:41.160 So let's say I'm[br]indifferent between any 0:02:41.160,0:02:44.270 of these points, any of those[br]points right over there. 0:02:44.270,0:02:45.770 Let me draw it a[br]little bit better. 0:02:45.770,0:02:49.710 So between any of these[br]points right over there. 0:02:49.710,0:02:52.650 So for example, I could[br]have 18 bars of chocolate 0:02:52.650,0:02:57.900 and 1 pound of fruit,[br]or I could have-- 0:02:57.900,0:03:00.420 let's say that is[br]4 bars of chocolate 0:03:00.420,0:03:05.620 and roughly 8 pounds of fruit. 0:03:05.620,0:03:06.550 I'm indifferent. 0:03:06.550,0:03:09.500 I get the same[br]exact total utility. 0:03:09.500,0:03:12.420 Now, am I maximizing[br]my total utility 0:03:12.420,0:03:14.410 at either of those points? 0:03:14.410,0:03:16.370 Well, we've already[br]seen that anything 0:03:16.370,0:03:18.200 to the top right[br]of our indifference 0:03:18.200,0:03:20.870 curve of this white curve right[br]over here-- let me label this. 0:03:20.870,0:03:24.240 This is our indifference curve. 0:03:24.240,0:03:26.450 Everything to the top right[br]of our indifference curve 0:03:26.450,0:03:27.280 is preferable. 0:03:27.280,0:03:29.340 We're going to get[br]more total utility. 0:03:29.340,0:03:31.250 So let me color that in. 0:03:31.250,0:03:34.720 So everything to the top right[br]of our indifference curve 0:03:34.720,0:03:35.930 is going to be preferable. 0:03:35.930,0:03:37.730 So all of these other[br]points on our budget 0:03:37.730,0:03:39.604 line, even a few points[br]below or budget line, 0:03:39.604,0:03:42.660 where we would actually[br]save money, are preferable. 0:03:42.660,0:03:45.660 So either of these[br]points are not 0:03:45.660,0:03:47.550 going to maximize[br]our total utility. 0:03:47.550,0:03:50.280 We can maximize or total utility[br]at all of these other points 0:03:50.280,0:03:52.570 in between, along[br]our budget line. 0:03:52.570,0:03:55.140 So to actually maximize[br]our total utility 0:03:55.140,0:03:58.300 what we want to do is find[br]a point on our budget line 0:03:58.300,0:04:03.863 that is just tangent, that[br]exactly touches at exactly one 0:04:03.863,0:04:05.820 point one of our[br]indifference curves. 0:04:05.820,0:04:07.560 We could have an infinite[br]number of indifference curves. 0:04:07.560,0:04:08.640 There could be another[br]indifference curve 0:04:08.640,0:04:09.510 that looks like that. 0:04:09.510,0:04:10.450 There could be another[br]indifferent curve 0:04:10.450,0:04:11.500 that looks like that. 0:04:11.500,0:04:13.958 All that says is that we are[br]indifferent between any points 0:04:13.958,0:04:14.860 on this curve. 0:04:14.860,0:04:18.260 And so there is an indifference[br]curve that touches exactly 0:04:18.260,0:04:21.792 this budget line, or exactly[br]touches the line at one point. 0:04:21.792,0:04:23.500 And so I might have[br]an indifference curve 0:04:23.500,0:04:25.530 that looks like this. 0:04:25.530,0:04:29.230 Let me do this in a[br]vibrant color, in magenta. 0:04:29.230,0:04:32.610 So I could have an indifference[br]curve that looks like this. 0:04:32.610,0:04:36.280 And because it's tangent, it[br]touches at exactly one point. 0:04:36.280,0:04:38.410 And also the slope of[br]my indifference curve, 0:04:38.410,0:04:40.118 which we've learned[br]was the marginal rate 0:04:40.118,0:04:45.620 of substitution, is the exact[br]same as the slope of our budget 0:04:45.620,0:04:47.320 line right over there,[br]which we learned 0:04:47.320,0:04:49.440 earlier was the relative price. 0:04:49.440,0:04:53.690 So this right about here[br]is the optimal allocation 0:04:53.690,0:04:55.780 on our budget line. 0:04:55.780,0:04:57.260 That right here is optimal. 0:04:57.260,0:04:59.120 And how do we know[br]it is optimal? 0:04:59.120,0:05:01.750 Well, there is no other[br]point on the budget line 0:05:01.750,0:05:03.090 that is to the top right. 0:05:03.090,0:05:07.340 In fact, every other[br]point on our budget line 0:05:07.340,0:05:10.200 is to the bottom left of[br]this indifference curve. 0:05:10.200,0:05:14.740 So every other point on our[br]budget line is not preferable. 0:05:14.740,0:05:18.710 So remember, everything[br]below an indifference curve-- 0:05:18.710,0:05:19.835 so all of this shaded area. 0:05:19.835,0:05:21.460 Let me actually do[br]it in another color. 0:05:21.460,0:05:23.380 Because indifference[br]curve, we are different. 0:05:23.380,0:05:25.463 But everything below an[br]indifference curve, so all 0:05:25.463,0:05:29.370 of this area in green,[br]is not preferable. 0:05:29.370,0:05:31.480 And every other point[br]on the budget line 0:05:31.480,0:05:35.090 is not preferable to that[br]point right over there. 0:05:35.090,0:05:37.510 Because that's the only point--[br]or I guess you could say, 0:05:37.510,0:05:39.010 every other point[br]on our budget line 0:05:39.010,0:05:43.270 is not preferable to the points[br]on the indifference curve. 0:05:43.270,0:05:46.260 So they're also not preferable[br]to that point right over there 0:05:46.260,0:05:49.570 which actually is on[br]the indifference curve. 0:05:49.570,0:05:51.880 Now, let's think[br]about what happens. 0:05:51.880,0:05:55.310 Let's think about what[br]happens if the price of fruit 0:05:55.310,0:05:56.480 were to go down. 0:05:56.480,0:06:04.790 So the price of fruit were to[br]go from $2 to $1 per pound. 0:06:04.790,0:06:07.610 So if the price of fruit[br]went from $2 to $1, then 0:06:07.610,0:06:09.790 our actual budget line[br]will look different. 0:06:09.790,0:06:11.362 Our new budget line. 0:06:11.362,0:06:13.070 I'll do it in blue,[br]would look like this. 0:06:13.070,0:06:14.180 If we spent all our[br]money on chocolate, 0:06:14.180,0:06:15.280 we could buy 20 bars. 0:06:15.280,0:06:18.040 If we spent all of our money[br]on fruit at the new price, 0:06:18.040,0:06:20.460 we could buy 20 pounds of fruit. 0:06:20.460,0:06:25.120 So our new budget line would[br]look something like that. 0:06:28.090,0:06:29.840 So that is our new budget line. 0:06:35.630,0:06:38.210 So now what would be[br]the optimal allocation 0:06:38.210,0:06:40.990 of our dollars or the best[br]combination that we would buy? 0:06:40.990,0:06:43.270 Well, we would do the[br]exact same exercise. 0:06:43.270,0:06:46.030 We would, assuming[br]that we had data 0:06:46.030,0:06:48.282 on all of these[br]indifference curves, 0:06:48.282,0:06:49.990 we would find the[br]indifference curve that 0:06:49.990,0:06:53.520 is exactly tangent to[br]our new budget line. 0:06:53.520,0:06:56.910 So let's say that this[br]point right over here 0:06:56.910,0:07:00.830 is exactly tangent to[br]another indifference curve. 0:07:00.830,0:07:01.980 So just like that. 0:07:01.980,0:07:05.270 So there's another indifference[br]curve that looks like that. 0:07:05.270,0:07:07.180 Let me draw it a[br]little bit neater. 0:07:07.180,0:07:10.910 So it looks something like that. 0:07:10.910,0:07:13.890 And so based on how the price--[br]if we assume we have access 0:07:13.890,0:07:16.980 to these many, many, many,[br]many, many indifference curves, 0:07:16.980,0:07:21.110 we can now see based[br]on, all else equal, 0:07:21.110,0:07:24.090 how a change in[br]the price of fruit 0:07:24.090,0:07:26.750 changed the quantity[br]of fruit we demanded. 0:07:26.750,0:07:29.890 Because now our optimal spent[br]is this point on our new budget 0:07:29.890,0:07:34.540 line which looks like it's[br]about, well, give or take, 0:07:34.540,0:07:36.810 about 10 pounds of fruit. 0:07:36.810,0:07:39.640 So all of a sudden,[br]when we were-- so let's 0:07:39.640,0:07:41.060 think about just the fruit. 0:07:41.060,0:07:42.560 Everything else[br]we're holding equal. 0:07:42.560,0:07:47.030 So just the fruit, let's[br]do, when the price was $2, 0:07:47.030,0:07:50.600 the quantity demanded[br]was 8 pounds. 0:07:50.600,0:07:52.520 And now when the price[br]is $1, the quantity 0:07:52.520,0:07:54.205 demanded is 10 pounds. 0:07:54.205,0:07:55.580 And so what we're[br]actually doing, 0:07:55.580,0:07:58.530 and once again, we're kind of[br]looking at the exact same ideas 0:07:58.530,0:07:59.650 from different directions. 0:07:59.650,0:08:03.160 Before we looked at it in terms[br]of marginal utility per dollar 0:08:03.160,0:08:05.130 and we thought about[br]how you maximize it. 0:08:05.130,0:08:07.190 And we were able to[br]change the prices 0:08:07.190,0:08:09.539 and then figure out and derive[br]a demand curve from that. 0:08:09.539,0:08:12.080 Here we're just looking at it[br]from a slightly different lens, 0:08:12.080,0:08:14.860 but they really are[br]all of the same ideas. 0:08:14.860,0:08:17.280 But by-- assuming[br]if we had access 0:08:17.280,0:08:18.870 to a bunch of[br]indifference curves, 0:08:18.870,0:08:22.880 we can see how a change in[br]price changes our budget line. 0:08:22.880,0:08:25.610 And how that would change[br]the optimal quantity 0:08:25.610,0:08:28.244 we would want of[br]a given product. 0:08:28.244,0:08:29.910 So for example, we[br]could keep doing this 0:08:29.910,0:08:32.429 and we could plot[br]our new demand curve. 0:08:32.429,0:08:34.220 So I could do a demand[br]curve now for fruit. 0:08:34.220,0:08:36.730 At least I have two points[br]on that demand curve. 0:08:36.730,0:08:39.010 So if this is the[br]price of fruit and this 0:08:39.010,0:08:42.872 is the quantity demanded of[br]fruit, when the price is $2, 0:08:42.872,0:08:44.400 the quantity demanded is 8. 0:08:47.620,0:08:49.000 And when the price[br]is-- actually, 0:08:49.000,0:08:50.610 let me do it a[br]little bit different. 0:08:50.610,0:08:53.820 When the price is $2--[br]these aren't to scale-- 0:08:53.820,0:08:56.905 the quantity demanded is 8. 0:08:56.905,0:08:58.687 Actually let me[br]do it here-- is 8. 0:08:58.687,0:08:59.770 And these aren't to scale. 0:08:59.770,0:09:03.710 But when the price is $1,[br]the quantity demanded is 10. 0:09:03.710,0:09:06.625 So $2, 8, the quantity[br]demanded is 10. 0:09:09.140,0:09:11.570 And so our demand curve,[br]these are two points on it. 0:09:11.570,0:09:14.010 But we could keep changing[br]it up assuming we had access 0:09:14.010,0:09:15.630 to a bunch of[br]indifference curves. 0:09:15.630,0:09:18.150 We could keep changing[br]it up and eventually plot 0:09:18.150,0:09:23.640 our demand curve, that might[br]look something like that.