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    Indifference Curves

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    jia
    The consumer is in equilibrium when the price line is tangent to the highest attainable indifference curve, where the marginal rate of substitution equals the price ratio of the goods.

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    © All Rights Reserved
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    Indifference Curves

    Uploaded by

    jia
    16 views18 pages
    The consumer is in equilibrium when the price line is tangent to the highest attainable indifference curve, where the marginal rate of substitution equals the price ratio of the goods.

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    © © All Rights Reserved

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    The consumer is in equilibrium when the price line is tangent to the highest attainable indifference curve, where the marginal rate of substitution equals the price ratio of the goods.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    16 views18 pages

    Indifference Curves

    Uploaded by

    jia
    The consumer is in equilibrium when the price line is tangent to the highest attainable indifference curve, where the marginal rate of substitution equals the price ratio of the goods.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 18

    Indifference Curves

    The IC curve is the locus of different


    combinations of two goods which yield the
    same level of satisfaction.
    Marginal rate of Substitution (IC)
    Combination Good X Good Y MRSxy

    A 1 13 ----

    B 2 9 4:1

    C 3 6 3:1

    D 4 4 2:1

    E 5 3 1:1
    Indifference Curve

    15
    10
    GoodY

    5
    0
    0 2 4 6
    Good X
    Properties of Indifference Curves
     IC curves are negatively sloped
     Higher IC curve represent higher level of
    satisfaction
     IC curves are convex to the origin
     The IC curves can not intersect each other
    Marginal rate of Substitution
    “ Marginal rate of Substitution ( MRS ) is the
    ratio of exchange between the small units of
    to commodities , which are equally valued or
    preferred by a consumer ”
    MRSxy = ΔY/ ΔX
    “The MRS of X for Y measures the number of
    units of Y that must be sacrificed for unit of X
    gained so as to maintain a constant level of
    satisfaction”
    Marginal rate of Substitution
    The MRS shows how much of one commodity
    is substituted for how much another or at
    what rate a consumer is willing to substitute
    one commodity for another in his
    consumption pattern.

    MRS is the personal exchange rate of the


    consumer in contrast to the market exchange
    rate.
    Price line or Budget line
    A budget line or price line represents the
    various combinations of two goods which can
    be purchased with a given money income and
    assumed prices of goods.
    For example:
     Consumer has Rs.60
     He wants to purchase Biscuits & Chocolates
     Price of each packet of biscuit is Rs.6
     Price of each chocolate is Rs.12
    Budget line
    Market basket biscuits packets Chocolates
    per week per week
    A 10 0

    B 8 1

    C 6 2

    D 4 3

    E 2 4

    F 0 5
    Budget line

    Budget Line

    15
    10
    Biscuits

    5
    0
    0 1 2 3 4 5 6
    Chocolate
    Shifts in budget
    The price line or budget line is determined
    by the income of the consumer and the
    prices of goods in the market. If there is any
    change in the income of the consumer or in
    the prices of goods, the price line shifts in
    response to a change in these two factors.
    These changes are:
    1. Income changes
    2. Price changes
    Income changes
    When there is a change in income of the
    consumer , the prices of goods remaining the
    same, the price line shifts from the original
    position. When income increases consumer
    can purchase more of the commodity so the
    budget line will shift to the right side from its
    original position. In case of fall in income the
    consumption of both normal goods will
    decreased and price line will shift to the left.
    Income changes

    Income changes

    15
    10
    Good Y

    5
    0
    -5 0 2 4 6 8

    Good X
    Price changes

    If there is a fall in the price of good


    A, the income of the consumer and
    the price of other good remain
    constant, the price line will rotate
    and not the whole curve will shift.
    Price changes

    Price Changes

    40
    30
    20
    Good Y

    10
    0
    -10 0 2 4 6 8
    Good X
    Consumer’s equilibrium
    The consumer is in equilibrium when he gets
    maximum possible satisfaction from his
    purchases, given his income and the prices of
    goods in the market.
    Definition:
    “Given the price line and indifference map
    the consumer is said to be in equilibrium at a
    point where the price line is touching the
    highest attainable indifference curve from
    below”
    Consumer’s equilibrium
    The consumer’s equilibrium under the
    indifference curve theory must meet the
    following two conditions:
    1. A given price line should be tangent to an
    indifference curve or marginal rate of
    substitution of good X for good Y (MRSxy)
    must be equal to the price ratio of two goods.
    2. Indifference curve must be convex to the
    origin at the point of tangency.
    Consumer’s equilibrium
    Assumptions:
    1. Rationality:
    The consumer is rational. He want to obtain
    maximum satisfaction given his income and
    prices.
    2. Utility is ordinal:
    It is assumed that the consumer can rank his
    preferences according to the satisfaction of
    each combination of goods.
    Consumer’s equilibrium
    3. Perfect market:
    There is the perfect competition in the market.
    4. The consumer has fixed amount of money to
    spend on good X and good Y.
    5. Prices of both goods are given.

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