Description
Highlights how to construct indifference curve, derive marginal rate of substitution, explains what is budget line, effect of increase in income on budget line, effect on budget line of a fall in the price of good, how to find optimum level of consumption, derives engel curve from income consumption curve.
Indifference Analysis
Indifference analysis
Indifference curves
Constructing an indifference curve
MangoesOranges 30 24 20 14 10 8 6 6 7 8 10 13 15 20 Point a b c d e f g
Combinations of Mangoes and oranges that Sameer likes the same amount as 10 Mangoes and 13 oranges
Constructing an indifference curve
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6 8 10
MangoesOranges 30 24 20 14 10 8 6 6 7 8 10 13 15 20 Point a b c d e f g
Mangoes
12
14
16
18
20
22
Oranges
Constructing an indifference curve
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6
a
MangoesOranges 30 24 20 14 10 8 6 6 7 8 10 13 15 20 Point a b c d e f g
Mangoes
8
10
12
14
16
18
20
22
Oranges
Constructing an indifference curve
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6
a
MangoesOranges Point a b c d e f g
b
Mangoes
30 24 20 14 10 8 6
6 7 8 10 13 15 20
8
10
12
14
16
18
20
22
Oranges
Constructing an indifference curve
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6
a
MangoesOranges Point a b c d e f g
b
c
Mangoes
d
30 24 20 14 10 8 6
6 7 8 10 13 15 20
e f
g
8
10
12
14
16
18
20
22
Oranges
Deriving the marginal rate of substitution (MRS)
30
a DY = 4 MRS = 4 b
26
DX = 1 Units of good Y
20
MRS = DY/DX
10
0 0
67
10
20
Units of good X
Deriving the marginal rate of substitution (MRS)
30
a DY = 4 MRS = 4 b
26
DX = 1 Units of good Y
20
MRS = DY/DX
10
9
DY = 1
c
MRS = 1 d
DX = 1
0 0
67
10
13 14
20
Units of good X
An indifference map
30
Units of good Y
20
10
I5 I2
20
I3
I4
0 0 10
I1 Units of good X
The impossibility of two indifference curves crossing
30
Units of good Y
20
a
10
b I1
0 0 10 20
Units of good X
The impossibility of two indifference curves crossing
30
Units of good Y
20
a
10
b
I2 I1
0 0 10 20
Units of good X
The impossibility of two indifference curves crossing 30 (if two curve intersect intersect imply two level of satifaction which is impossible)
Units of good Y
20
a
10
c
b I2 I1
0 0 10 20
Units of good X
Indifference analysis
Budget lines
A budget line
Units of good X
0 5 10 15
Units of good Y
30 20 10 0
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
A budget line
30
a
Units of good X Units of Point on good Y budget line
30 20 10 0
Units of good Y
20
0 5 10 15
a
10
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10 15 20
Units of good X
A budget line
30
a
Units of good X Units of Point on good Y budget line
30 20 10 0
Units of good Y
20
b
0 5 10 15
a b
10
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10 15 20
Units of good X
A budget line
30
a
Units of good X Units of Point on good Y budget line
30 20 10 0
Units of good Y
20
b
0 5 10 15
a b c
10
c
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10 15 20
Units of good X
A budget line
30
a
Units of good X Units of Point on good Y budget line
30 20 10 0
Units of good Y
20
b
0 5 10 15
a b c d
10
c
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10
d
15 20
Units of good X
Effect of an increase in income on the budget line
40
30
Units of good Y
20
Assumptions
10
PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10 15 20
Units of good X
Effect of an increase in income on the budget line
40
Assumptions
30
Units of good Y
PX = Rs2 PY = Rs1 Budget = Rs40
20
16
n
m
10
Budget = Rs40 Budget = Rs30
0 5
7
0 10
15
20
Units of good X
Effect on the budget line of a fall in the price of good X
30
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
Units of good Y
20
10
0 0 5 10 15 20 25 30
Units of good X
Effect on the budget line of a fall in the price of good X
30
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
Units of good Y
20
10
0 0 5 10 15 20 25 30
Units of good X
Effect on the budget line of a fall in the price of good X
30
Assumptions PX = Rs1 PY = Rs1 Budget = Rs30
Units of good Y
20
10
0 0 5 10 15 20 25 30
Units of good X
Effect on the budget line of a fall in the price of good X
30
a
Assumptions PX = Rs1 PY = Rs1 Budget = Rs30
Units of good Y
20
10
B1
0 0 5 10
B2
b c
20 25 30
15
Units of good X
Indifference analysis
The optimal level of consumption
Finding the optimum consumption
Units of good Y O Units of good X
Finding the optimum consumption
Units of good Y
I5 I2 I3 I4
I1 O Units of good X
Finding the optimum consumption
Units of good Y
Budget line
I5 I2 I3 I4
I1 O Units of good X
Finding the optimum consumption
r s Units of good Y
Y1
t
u v I1 O X1 Units of good X I2 I3
I5 I4
Indifference analysis
Effects of a change in income
Effect on consumption of a change in income
Units of good Y
a
B1 O Units of good X
I1
Effect on consumption of a change in income
Units of good Y
B1 O
B2
I1
I2
Units of good X
Effect on consumption of a change in income
Units of good Y
I4 I3 B1 O Units of good X B2 B3 B4 I1 I2
Effect on consumption of a change in income
Units of good Y
Income-consumption curve
I4 I3 B1 O Units of good X B2 B3 B4 I1 I2
Deriving an Engel curve from an income-consumption curve
Bread
I3 B1
B2
I1
I2 B3
CDs
Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption curve I3 B1
B2
I1
I2 B3
CDs
Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption curve I3 B1
B2
I1
I2 B3
CDs Income (Rs)
Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption curve Qb1
a
I3 B1 Qcd1
B2
I1
I2 B3
CDs
Income (Rs)
Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption curve Qb1
a
I3 B1 Qcd1
B2
I1
I2 B3
CDs
Income (Rs)
Y1
a
Qcd1
Deriving an Engel curve from an income-consumption curve
Bread
Qb2 Qb1
a
b
Income-consumption curve I3 B1
B2
I1
I2 B3
Qcd1Qcd2
CDs
Income (Rs)
Y2 Y1
b a
Qcd1Qcd2
Deriving an Engel curve from an income-consumption curve
Bread
Qb3 Qb2 Qb1
a
b
Income-consumption c curve I3 B1
B2
I1
I2 B3
Qcd1Qcd2 Qcd3
CDs
Income (Rs)
Y3 Y2 Y1
c b a
Qcd1Qcd2Qcd3
Deriving an Engel curve from an income-consumption curve
Bread
Qb3 Qb2 Qb1
a
b
Income-consumption c curve I3 B1
B2
I1
I2 B3
Qcd1Qcd2 Qcd3
CDs
Engel curve
Income (Rs)
Y3 Y2 Y1
c b a
Qcd1Qcd2Qcd3
Effect of a rise in income on the demand for an inferior good
Units of good Y (normal good)
a B O
1
I1
Units of good X (inferior good)
Effect of a rise in income on the demand for an inferior good
Units of good Y (normal good)
b
I2
a B O
1
I1
B
2
Units of good X (inferior good)
Effect of a rise in income on the demand for an inferior good
Income-consumption curve Units of good Y (normal good) b
I2
a B O
1
I1
B
2
Units of good X (inferior good)
Indifference analysis
Effects of a change in price
Effect of a fall in the price of good X
30
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
Units of good Y
20
10
0 0 5 10 15 20 25 30
Units of good X
Effect of a fall in the price of good X
30
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
Units of good Y
20
j
10
0 0 5 10
B1
15 20 25
I1
30
Units of good X
Effect of a fall in the price of good X
30
Assumptions PX = Rs1 PY = Rs1 Budget = Rs30
Units of good Y
20
j
10
0 0 5 10
B1
15 20 25
I1
30
Units of good X
Effect of a fall in the price of good X
30
a
Assumptions PX = Rs1 PY = Rs1 Budget = Rs30
Units of good Y
20
j k
10
I2
B1
0 5 10 15 20 25
0
I1
B2
30
Units of good X
30
aEffect of a fall in the price of good X
Units of good Y
20
j k
10
I
2
0 0 5 10
B1 Units of good X
15 20 25
I1
B2
30
Deriving a demand curve from a price-consumption curve
Expenditure on all other goods
a
B1
I1
Units of good X
Deriving a demand curve from a price-consumption curve
Fall in the price of X a b
Expenditure on all other goods
B1
B2
I1
I2
Units of good X
Deriving a demand curve from a price-consumption curve
Further falls in the price of X a b
Expenditure on all other goods
B1
B2
I1
I2
Units of good X
Deriving a demand curve from a price-consumption curve
Further falls in the price of X a b c d
Expenditure on all other goods
B1
B2
B3
I2 I1 B4
I3
I4
Units of good X
Deriving a demand curve from a price-consumption curve
Expenditure on all other goods
a
b
c
d
Price-consumption curve
I4
B1
B2
B3
I2 I1 B4
I3
Units of good X
Deriving a demand curve from a price-consumption curve
Expenditure on all other goods
a
b
c
d
Price-consumption curve
I4
B1
B2
B3
I2 I1 B4
I3
Units of good X Price of good X P1 a
Q1
Units of good X
Deriving a demand curve from a price-consumption curve
Expenditure on all other goods
a
b
c
d
Price-consumption curve
I4
B1
B2
B3
I2 I1 B4
I3
Units of good X Price of good X P1 a
P2 P3 P4
b c d Demand Q1 Q2 Q3 Q4 Units of good X
doc_740107593.pptx
Highlights how to construct indifference curve, derive marginal rate of substitution, explains what is budget line, effect of increase in income on budget line, effect on budget line of a fall in the price of good, how to find optimum level of consumption, derives engel curve from income consumption curve.
Indifference Analysis
Indifference analysis
Indifference curves
Constructing an indifference curve
MangoesOranges 30 24 20 14 10 8 6 6 7 8 10 13 15 20 Point a b c d e f g
Combinations of Mangoes and oranges that Sameer likes the same amount as 10 Mangoes and 13 oranges
Constructing an indifference curve
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6 8 10
MangoesOranges 30 24 20 14 10 8 6 6 7 8 10 13 15 20 Point a b c d e f g
Mangoes
12
14
16
18
20
22
Oranges
Constructing an indifference curve
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6
a
MangoesOranges 30 24 20 14 10 8 6 6 7 8 10 13 15 20 Point a b c d e f g
Mangoes
8
10
12
14
16
18
20
22
Oranges
Constructing an indifference curve
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6
a
MangoesOranges Point a b c d e f g
b
Mangoes
30 24 20 14 10 8 6
6 7 8 10 13 15 20
8
10
12
14
16
18
20
22
Oranges
Constructing an indifference curve
30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6
a
MangoesOranges Point a b c d e f g
b
c
Mangoes
d
30 24 20 14 10 8 6
6 7 8 10 13 15 20
e f
g
8
10
12
14
16
18
20
22
Oranges
Deriving the marginal rate of substitution (MRS)
30
a DY = 4 MRS = 4 b
26
DX = 1 Units of good Y
20
MRS = DY/DX
10
0 0
67
10
20
Units of good X
Deriving the marginal rate of substitution (MRS)
30
a DY = 4 MRS = 4 b
26
DX = 1 Units of good Y
20
MRS = DY/DX
10
9
DY = 1
c
MRS = 1 d
DX = 1
0 0
67
10
13 14
20
Units of good X
An indifference map
30
Units of good Y
20
10
I5 I2
20
I3
I4
0 0 10
I1 Units of good X
The impossibility of two indifference curves crossing
30
Units of good Y
20
a
10
b I1
0 0 10 20
Units of good X
The impossibility of two indifference curves crossing
30
Units of good Y
20
a
10
b
I2 I1
0 0 10 20
Units of good X
The impossibility of two indifference curves crossing 30 (if two curve intersect intersect imply two level of satifaction which is impossible)
Units of good Y
20
a
10
c
b I2 I1
0 0 10 20
Units of good X
Indifference analysis
Budget lines
A budget line
Units of good X
0 5 10 15
Units of good Y
30 20 10 0
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
A budget line
30
a
Units of good X Units of Point on good Y budget line
30 20 10 0
Units of good Y
20
0 5 10 15
a
10
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10 15 20
Units of good X
A budget line
30
a
Units of good X Units of Point on good Y budget line
30 20 10 0
Units of good Y
20
b
0 5 10 15
a b
10
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10 15 20
Units of good X
A budget line
30
a
Units of good X Units of Point on good Y budget line
30 20 10 0
Units of good Y
20
b
0 5 10 15
a b c
10
c
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10 15 20
Units of good X
A budget line
30
a
Units of good X Units of Point on good Y budget line
30 20 10 0
Units of good Y
20
b
0 5 10 15
a b c d
10
c
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10
d
15 20
Units of good X
Effect of an increase in income on the budget line
40
30
Units of good Y
20
Assumptions
10
PX = Rs2 PY = Rs1 Budget = Rs30
0 0 5 10 15 20
Units of good X
Effect of an increase in income on the budget line
40
Assumptions
30
Units of good Y
PX = Rs2 PY = Rs1 Budget = Rs40
20
16
n
m
10
Budget = Rs40 Budget = Rs30
0 5
7
0 10
15
20
Units of good X
Effect on the budget line of a fall in the price of good X
30
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
Units of good Y
20
10
0 0 5 10 15 20 25 30
Units of good X
Effect on the budget line of a fall in the price of good X
30
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
Units of good Y
20
10
0 0 5 10 15 20 25 30
Units of good X
Effect on the budget line of a fall in the price of good X
30
Assumptions PX = Rs1 PY = Rs1 Budget = Rs30
Units of good Y
20
10
0 0 5 10 15 20 25 30
Units of good X
Effect on the budget line of a fall in the price of good X
30
a
Assumptions PX = Rs1 PY = Rs1 Budget = Rs30
Units of good Y
20
10
B1
0 0 5 10
B2
b c
20 25 30
15
Units of good X
Indifference analysis
The optimal level of consumption
Finding the optimum consumption
Units of good Y O Units of good X
Finding the optimum consumption
Units of good Y
I5 I2 I3 I4
I1 O Units of good X
Finding the optimum consumption
Units of good Y
Budget line
I5 I2 I3 I4
I1 O Units of good X
Finding the optimum consumption
r s Units of good Y
Y1
t
u v I1 O X1 Units of good X I2 I3
I5 I4
Indifference analysis
Effects of a change in income
Effect on consumption of a change in income
Units of good Y
a
B1 O Units of good X
I1
Effect on consumption of a change in income
Units of good Y
B1 O
B2
I1
I2
Units of good X
Effect on consumption of a change in income
Units of good Y
I4 I3 B1 O Units of good X B2 B3 B4 I1 I2
Effect on consumption of a change in income
Units of good Y
Income-consumption curve
I4 I3 B1 O Units of good X B2 B3 B4 I1 I2
Deriving an Engel curve from an income-consumption curve
Bread
I3 B1
B2
I1
I2 B3
CDs
Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption curve I3 B1
B2
I1
I2 B3
CDs
Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption curve I3 B1
B2
I1
I2 B3
CDs Income (Rs)
Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption curve Qb1
a
I3 B1 Qcd1
B2
I1
I2 B3
CDs
Income (Rs)
Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption curve Qb1
a
I3 B1 Qcd1
B2
I1
I2 B3
CDs
Income (Rs)
Y1
a
Qcd1
Deriving an Engel curve from an income-consumption curve
Bread
Qb2 Qb1
a
b
Income-consumption curve I3 B1
B2
I1
I2 B3
Qcd1Qcd2
CDs
Income (Rs)
Y2 Y1
b a
Qcd1Qcd2
Deriving an Engel curve from an income-consumption curve
Bread
Qb3 Qb2 Qb1
a
b
Income-consumption c curve I3 B1
B2
I1
I2 B3
Qcd1Qcd2 Qcd3
CDs
Income (Rs)
Y3 Y2 Y1
c b a
Qcd1Qcd2Qcd3
Deriving an Engel curve from an income-consumption curve
Bread
Qb3 Qb2 Qb1
a
b
Income-consumption c curve I3 B1
B2
I1
I2 B3
Qcd1Qcd2 Qcd3
CDs
Engel curve
Income (Rs)
Y3 Y2 Y1
c b a
Qcd1Qcd2Qcd3
Effect of a rise in income on the demand for an inferior good
Units of good Y (normal good)
a B O
1
I1
Units of good X (inferior good)
Effect of a rise in income on the demand for an inferior good
Units of good Y (normal good)
b
I2
a B O
1
I1
B
2
Units of good X (inferior good)
Effect of a rise in income on the demand for an inferior good
Income-consumption curve Units of good Y (normal good) b
I2
a B O
1
I1
B
2
Units of good X (inferior good)
Indifference analysis
Effects of a change in price
Effect of a fall in the price of good X
30
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
Units of good Y
20
10
0 0 5 10 15 20 25 30
Units of good X
Effect of a fall in the price of good X
30
Assumptions PX = Rs2 PY = Rs1 Budget = Rs30
Units of good Y
20
j
10
0 0 5 10
B1
15 20 25
I1
30
Units of good X
Effect of a fall in the price of good X
30
Assumptions PX = Rs1 PY = Rs1 Budget = Rs30
Units of good Y
20
j
10
0 0 5 10
B1
15 20 25
I1
30
Units of good X
Effect of a fall in the price of good X
30
a
Assumptions PX = Rs1 PY = Rs1 Budget = Rs30
Units of good Y
20
j k
10
I2
B1
0 5 10 15 20 25
0
I1
B2
30
Units of good X
30
aEffect of a fall in the price of good X
Units of good Y
20
j k
10
I
2
0 0 5 10
B1 Units of good X
15 20 25
I1
B2
30
Deriving a demand curve from a price-consumption curve
Expenditure on all other goods
a
B1
I1
Units of good X
Deriving a demand curve from a price-consumption curve
Fall in the price of X a b
Expenditure on all other goods
B1
B2
I1
I2
Units of good X
Deriving a demand curve from a price-consumption curve
Further falls in the price of X a b
Expenditure on all other goods
B1
B2
I1
I2
Units of good X
Deriving a demand curve from a price-consumption curve
Further falls in the price of X a b c d
Expenditure on all other goods
B1
B2
B3
I2 I1 B4
I3
I4
Units of good X
Deriving a demand curve from a price-consumption curve
Expenditure on all other goods
a
b
c
d
Price-consumption curve
I4
B1
B2
B3
I2 I1 B4
I3
Units of good X
Deriving a demand curve from a price-consumption curve
Expenditure on all other goods
a
b
c
d
Price-consumption curve
I4
B1
B2
B3
I2 I1 B4
I3
Units of good X Price of good X P1 a
Q1
Units of good X
Deriving a demand curve from a price-consumption curve
Expenditure on all other goods
a
b
c
d
Price-consumption curve
I4
B1
B2
B3
I2 I1 B4
I3
Units of good X Price of good X P1 a
P2 P3 P4
b c d Demand Q1 Q2 Q3 Q4 Units of good X
doc_740107593.pptx