This document summarizes key concepts of choice theory, including the production possibilities frontier (PPF) which shows the optimal combinations of goods an economy can produce, individual budget lines which show affordable combinations of goods, assumptions about preferences such as more being better and averages being preferred, indifference curves that model preferences, and how optimal choices are made by equalizing the marginal rate of substitution with relative prices based on the budget line. This leads to the derivation of demand curves and exploring the substitution and income effects of price changes.

1. Micro review:Choice theory juliohuato@gmail.com

2. Choice theory 2-good space: apples (a), fig leaves (f) Resource constraint: Collective: Production Possibilities Frontier (PPF) Individual: Budget line Preferences Optimal choice Derivation of individual demand

3. The 2-good space

4. PPF assumptions & concepts Assumptions: Given resources Given technology Full employment Two goods Concepts: Feasible set: Bundles that can be produced Efficiency: The frontier bundles MRTaf = MCa/MCf(definition)

5. Concave PPF (increasing MRT)

6. Linear PPF (constant MRT)

7. Budget line

8. Budget line

9. Graph of Adam’s budget line

10. Preferences Assumptions: More is better (monotonicity) Averages are better (convexity) Choices are consistent (transitivity)

11. More is better

12. Averages are better

13. Consistent choices

14. An indifference map

15. Marginal rate of substitution: MRSaf

16. Optimal choice

17. Optimal choice

18. Optimal choice: MRSaf = pa/pf

19. Deriving the demand curve

20. Substitution & income effects