Important questions for class 12 economics budget set. That is to say, they would be indifferent to either good. However, she cannot afford any of the bundles that give her a utility of 1200 as this whole indifference curve lies above the budget line. How to derive consumers equilibrium through the technique of. The indifference curve shows the different combinations of two goods that give equal satisfaction and utility to the consumers. The units of good 2 the consumer is willing to sacrifice for an extra unit of good 1 mrs is equal to the opportunity cost of an extra unit of good 1 p 1 p 2. He has over twenty years experience as head of economics at leading schools. Let us understand this with the example of apples and bananas. A price decrease brings about an increase in real income. Y and prices of the two goods, we draw a budget line bl in figure 11. Deriving a demand curve from indifference curves and. Find janes utility maximizing choice of days spent traveling domestically and days spent in a. The consumers equilibrium in explained by combining the budget line and the indifference map. The consumer has no preference for either combination of goods on the same line because they are understood to provide the same level of utility to the consumer.
Indi erence curves, budget lines, and demand curves je hicks september 19, 2017 vancouver school of economics, university of british columbia. Introduction to indifference curves and budget lines. Indifference curves and consumer equilibrium economics. The slope of the indifference curve is equal to the slope of. It is also important to remember that the slope of the budget line is equal to the ratio of the prices of two goods. It is a rising curve from left to right as shown by icc 3 when goods x and y are normal goods. But the points that lie both below and above this budget line also have significance. Indifference curves and budget lines economics help. Thus, figure 2 shows that with budget constraint 3 the new consumption bundle becomes q x2, q y2 at point b. He writes extensively and is a contributor and presenter on cpd conferences in the uk and overseas. A households budget line describes the limits to a households consumption choices.
Indifference curvesintroductionthe origins of indifference analysis can be traced back to the work of late 19th century irish economist francis edgeworth, and later, to italian economist vilfredo pareto. Browse more topics under theory of consumer behavior. The magnitude of the income effect depends on the portion of income spent on x. Indifference curve analysis utility economic theories. Point c xc, yc has the same utility level as point a, which means xcyc 18. Thus, at equilibrium point, slope of budget line is equal to slope of the indifference curve. Preferences and indifference curves an indifference curve is a line that shows combinations of goods among which a consumer is indifferent.
Theory of consumer behaviour important questions for class 12 economics budget set, budget line and consumer equilibrium through indifference curve analysis or ordinal approach 1. Ordinal approach indifference curve characteristics budget line equilibrium of consumer. An indifference curve is a curve that shows all combination of a good that provide the same level of utility budget line represents all the combination of good and services that a consumer may purchase given current price within his given inc. Using figure 4, explain why the point of tangency of the budget line with an indifference curve is the consumers equilibrium position. At the point of tangency, the slope of the budget line p x p. Let us make an indepth study of the definition, diagram, assumptions, properties, budget line, equilibrium and analysis of indifference curve. Dec 16, 2010 finding the optimum consumption i 1 i 2 i 3 i 4 i 5 units of good y o units of good x budget line 27. Introduction to indifference curves and budget lines economics duration. On the other hand, an indifference curve depicts various combinations of two goods that provides a consumer with the same level of satisfaction.
The budget line, also called as budget constraint shows all the combinations of two commodities that a consumer can afford at given market prices and within the particular income level. Indifference curve, budget line, equilibrium of consumer. Budget line is drawn with the assumptions of constant income of consumer and constant prices of the commodities. The slope of the indifference curve is equal to the slope of the budget line mrs p 1 p 2. Indifference curve, in economics, graph showing various combinations of two things usually consumer goods that yield equal satisfaction or utility to an individual. The numerical slope of the budget line kh 1 is okoh 1 which is the reciprocal of the price per hour of leisure, oh 1 ok, or, the rate of wage w 1, say. Lillys budget constraint, given the prices of books and doughnuts and her income, is shown by the straight line. It does not tell us what the consumer is able to buy. In other words, the indifference curve is the graphical representation of different combinations of goods generally two, for which the consumers are indifferent, in terms of the overall satisfaction and the utility.
For example, here is a graph used to illustrate how inferior goods behave with increases in income. It will turn out that, if a group of simplifying assumptions are met, the best choice for the consumer. Understanding consumers equilibrium by indifference curve. Jan 18, 2012 now this budget line effectively represents an increased budget, because it is a parallel shift outwards from b2. Dec 20, 2017 budget line indiffernce curve economics, class 12th social studiessst duration. Furthermore, let us suppose that in period 1 the actual budget line 3 is tangent to the indifference curve at b in quadrant 4 b is not on an axis in period 1.
Jun 02, 2017 most generally and assuming youre referring to a utility map, it helps us understand the combinations of goods that lead to various levels of utility and most importantly helps us understand which combination maximizes utility subject to a bud. Because budget and prices are prone to change, joses budget line can shift and pivot. At the point where hongli maximizes utility, her marginal rate of substitution of q1 for q2 is. All other points on the budget line to the left or right of point e will lie on lower indifference curves and thus indicate a. Explain why any point where the budget line intersects an indifference curve is not equilibrium. According to the indifference curve approach, it is not possible for the consumer to say how much utility he derives from the consumption of a commodity, because utility is not a measureable magnitude. We know that the higher the indifference curve, the higher is the utility, and thus, utility maximizing consumer will strive to reach the highest. Developed by the irishborn british economist francis y. Edgeworth, it is widely used as an analytical tool in the study of consumer behaviour, particularly as related to consumer demand. Application of indifference curve analysis changes in. This is a detailed and an elucidated information about the concept deriving a demand curve from indifference curves and budget constraints. Indifference curve analysis the utility analysis suffers from a defect of subjective nature of utility i. Indifference curves and consumer equilibrium consumer equilibrium is reached at the point of tangency between the budget line and the highestattainable indifference curve. Finally, icc 5 is rising upwards bending towards xaxis.
Correspondence between utility function and indifference curves. An indifference curve works in a very simple fashion. Since an infinite number of indifference curves exist, even if only a few of them are drawn on any given diagram, there will always exist one indifference curve that touches the budget line at. What is the importance of the indifference curve analysis in. Consumers equilibrium through indifference curve analysis. In this note, i show how indi erence curves and budget constraints relate to demand curves. The farther from the origin the indifference curve is, the more the combinations of goods along that curve are preferred budget constraint the indifference map only reveals the ordering of consumer preferences among bundles of goods. When there is a reduction in the price of good x but no change in the price of good y, the budget line ab will showing upward. Deriving a demand curve from budget lines and indifference curves. Combining janet bains budget line and indifference curves from figure 7. In console b of figure, we plot p 1 against x 1 which is the first point on the demand curve for x1. The curve obtained by joining optimal consumption combinations such as e 1, e and e 2 is called the price consumption curve pcc. Indifference curves subscribe to email updates from tutor2u economics join s of fellow economics teachers and students all getting the tutor2u economics teams latest resources and support delivered fresh in their inbox every morning.
The starting point for indifference analysis is to identify possible baskets of goods and services which yield the same utility usefulness, or satisfaction to consumers. This is the point of consumer equilibrium, where the consumer purchases om quantity of commodity x and on quantity of commodity y. How i tricked my brain to like doing hard things dopamine detox. The consumer purchases ox 1 quantity of giffen good x and oy 1 quantity of good y. It shows the maximum possible amounts that can be spent on the two goods. Prices, income, and government restrictions limit a. It shows that the consumer successively moves on a higher indifference curve and becomes better off, with a fall in the price of good x p x. In consumer choice, we frequently encounter budget lines and indifference curves. The budget line is tangent to indifference curve ic 2 at point e. The slope of the indifference curve is equal to the slope. And, that tangent lines slope is the slope of the indifference curve at that particular point. Ordinal approach indifference curve characteristics. Preferences, utility, budget line and consumer equilibrium. Also assume that indifference curves have their normal shape, that is, the mrs becomes flatter as you move along the x axis for any indifference curve.
Rationing and indifference curve analysis explained with. Because the indifference curve ic 2 is the best possible indifference curve that the consumer can reach with the given resources budget line. Lillys optimal choice will be point b, where the budget line is tangent to the indifference curve. The icc is a horizontal straight line as shown by icc 4 when good y is a neutral good. It shows us the budget that the consumer would have needed, to stay at the original level of utility, the same indifference curve as he was on at bundle a. When is an indifference curve tangent to the budget line. Measure the quantity of hot dogs on the vertical axis and the quantity of hamburgers on the horizontal axis. Note that the priceoffer curve is the locus of tangencies between indifference curves and budget lines that pivot about one point on the vertical axis, in this case 0,4. From condition 1, we have known that consumers equilibrium exist at the point on indifference curve where budget line is tangent to the curve.
The point of tangency between the budget line and indifference curve is at 20x and 15y. The highest achievable indifference curve touches the budget constraint at a single point of tangency. The budget line set, slope and shift microeconomics. For a given budget line, the optimization point is at the point where the indifference curve is just tangent to the budget line. When one arrives at two options that are indifferent to the individual, these two points that represent them are on the same indifference curve. Application of indifference curve ic economics discussion. All lower indifference curves, like ul, will cross the budget line in two separate places. This is based on consumer preference and believes that we cannot quantitatively measure human satisfaction in monetary terms. Draw an imaginary budget line bl3 parallel to the new budget line bl2 and make it tangent to the initial indifference curve ic1, we get the tangent point c.
The indifference curve is a graph showing the different combinations of two goods that report the same satisfaction to a person, and are preferred to other combinations. Microeconomicsindifference curves and budget lines. Meaning an indifference curve is a graphical presentation of locus of all such points which shows different combinations of two commodities which gives equal satisfaction to the consumer indifference set it is set of combination of two commodities which offer a consumer the same level of satisfaction. An indifference curve represents a series of combinations between two different economic goods, between which an individual. Microeconomics, budget line, final exam practice problems the attached pdf file has better formatting. What is the difference between a budget line and an. Consumers budget it is the real purchasing power of consumer from which he can purchase the certain quantitative bundles of two goods at a given price 2. The income effect is the change in x in going from c to b. This approach assigns an order to consumer preferences rather than measure them in terms of money. Budget lines whilst the indifference curves are the mathematical representation of preferences, the budget set is the mathematical representation of all the bundles available to the consumer because their cost does not exceed herhis income. At e 1, the worker has og, of income and of, of leisure.
Four properties of indifference curves quickonomics. An indifference curve depicts a line representing all the combinations of two goods that consumers place equal value. Microeconomics, budget line, final exam practice problems. As one moves out along the offer curve, one is identifyi ng quantities demanded of g ood 1 as its price falls. We now describe in brief as to how indifference curves and budget lines can be used to analysis the effects on consumption due to a changes in the income of a consumer b changes in the price of a commodity. A budget line represents the different combinations of two goods that are affordable and are available to a consumer given hisher level of income and the market prices of the goods. The price line pt is tangent to the indifference curve ic 2 at point c.
And all the points below the line are inferior to all the points on the line. A new budget line would have to be drawn if either a income of the consumer changes, or b price of the commodity changes. The sum of the income and substitution effects is the total effect of a price change total change in x. An indifference curve represents a series of combinations between two different economic goods, between which an individual would be theoretically indifferent regardless of. The optimal point depends on joses preferences, which we will explore when we discuss joses indifference curve. Choose from 254 different sets of characteristics of indifference curves flashcards on quizlet. Geoff riley frsa has been teaching economics for over thirty years. Indi erence curves, budget lines, and demand curves.
Tutor material indifference curve budget line free download as powerpoint presentation. Learn characteristics of indifference curves with free interactive flashcards. Explicitly plot the points on the budget constraint associated with the even numbered quantities of hamburgers 0, 2. A popular alternative to the marginal utility analysis of demand is the indifference curve analysis. Units of good y o units of good x b 1 effect on consumption of a change in income i 1 29.156 509 537 785 1399 796 202 532 1124 618 200 950 772 86 1390 161 1273 569 486 987 77 1451 731 1430 1534 1247 975 1009 694 1098 65 490 293 949 1315 1268 763