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By:
MBA. Nazari Sajad
   A more advanced explanation of
    consumer behavior and equilibrium is
    based on (1) budget lines and (2)so-
    called indifference curves.
   A budget line (or, more technically,
    the budget constraint ) is a schedule
    or   curve   that   shows      various
    combinations of two products a
    consumer can purchase with a specific
    money income.
   If the price of product A is $1.50 and the
    price of product B is $1, a consumer could
    purchase all the combinations of A and B
    shown in Table 1 with $12 of money
    income.
   At one extreme, the consumer might spend all of
    his or her income on 8 units of A and have nothing
    left to spend on B. Or, by giving up 2 units of A and
    thereby “freeing” $3, the consumer could have 6
    units of A and 3 of B. And so on to the other
    extreme, at which the consumer could buy 12 units
    of B at $1 each, spending his or her entire money
    income on B with nothing left to spend on A.

Income: $1,200
         Price of X= $40
         Price of Y= $30

                            Equation of the budget line
         40
good Y




         35
         30
         25
         20
         15
         10
         5

              5 10 15 20 25 30 35 40
                                 good X
   Effects of Changes in Income

   Effects of Changes in Prices
   The location of the budget line varies with money
    income.
    An increase in money income shifts the budget line to
    the right; a decrease in money income shifts it to the
    left.
4.2indifference curve
   An indifference curve is the locus of
    points representing all the different
    combinations of two goods which
    yield equal level of utility to the
    consumer.
   Indifference schedule is a list of
    various combinations of commodities
    which are equally satisfactory to the
    consumer concerned.
4.2indifference curve
4.2indifference curve
   The marginal rate of substitution of X for Y
    (MRSxy) is defined as the amount of Y, the
    consumer is just willing to give up to get one
    more unit of X and maintain the same level
    of satisfaction.
   As the consumer increases the consumption of
    apples, then for getting every additional unit of
    apples, he will give up less and less of oranges,
    that is, 8:1, 4:1, 2:1, 1:1 respectively This is
    the Law of Diminishing MRS.
4.2indifference curve
   An indifference map is a complete set of
    indifference curves.

   It indicates the consumer’s preferences
    among all combinations of goods and
    services.

   The farther from the origin the indifference
    curve is, the more the combinations of goods
    along that curve are preferred.
4.2indifference curve
 Indifference curves are negatively sloped
   Given a combination of commodity X and commodity Y,
with every increase in X, the amount in Y should fall in order
that the level of satisfaction from every combination should
remain the same.

 Indifference curves are convex to the origin
   Convexity illustrates the law of diminishing marginal rate of
substitution.

 Indifference curves can never intersect each other
    Indifference curves can never intersect each other because
each      indifference curve represents a specific level of
satisfaction. If two indifference curves intersect each other,
then at the point of intersection, the consumer is experiencing
two different levels of utility.
   A consumer seeks a market basket that generates the
    maximum level of happiness. However, one’s money income
    and prices of goods imposes a limit on the level of
    satisfaction that one may attain. Thus, the income at the
    disposal of the consumer in conjunction with prices of the
    commodities will determine the budgetary constraint or the
    price line.
   Consumer equilibrium is attained when, given his budget constraint,
    the consumer reaches the highest possible point on the indifference
    curve. The maximum satisfaction is yielded when the consumer
    reaches equilibrium at the point of tangency between an indifference
    curve and the price line. At point E, the price line is tangent to the
    indifference curve.

   At the equilibrium point, slope of indifference curve = slope of price
    line

   slope of indifference curve = MRS

           slope of price line = PX / PY

   Thus, at point E,      MRS = PX / PY

   Thus, satisfaction is maximized when the marginal rate of
    substitution of X for Y is just equal to the price of X to the price of Y.
4.2indifference curve

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4.2indifference curve

  • 2. A more advanced explanation of consumer behavior and equilibrium is based on (1) budget lines and (2)so- called indifference curves.
  • 3. A budget line (or, more technically, the budget constraint ) is a schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income.
  • 4. If the price of product A is $1.50 and the price of product B is $1, a consumer could purchase all the combinations of A and B shown in Table 1 with $12 of money income.
  • 5. At one extreme, the consumer might spend all of his or her income on 8 units of A and have nothing left to spend on B. Or, by giving up 2 units of A and thereby “freeing” $3, the consumer could have 6 units of A and 3 of B. And so on to the other extreme, at which the consumer could buy 12 units of B at $1 each, spending his or her entire money income on B with nothing left to spend on A.
  • 6.
  • 7. Income: $1,200 Price of X= $40 Price of Y= $30 Equation of the budget line 40 good Y 35 30 25 20 15 10 5 5 10 15 20 25 30 35 40 good X
  • 8. Effects of Changes in Income  Effects of Changes in Prices
  • 9. The location of the budget line varies with money income.  An increase in money income shifts the budget line to the right; a decrease in money income shifts it to the left.
  • 11. An indifference curve is the locus of points representing all the different combinations of two goods which yield equal level of utility to the consumer.
  • 12. Indifference schedule is a list of various combinations of commodities which are equally satisfactory to the consumer concerned.
  • 15. The marginal rate of substitution of X for Y (MRSxy) is defined as the amount of Y, the consumer is just willing to give up to get one more unit of X and maintain the same level of satisfaction.
  • 16. As the consumer increases the consumption of apples, then for getting every additional unit of apples, he will give up less and less of oranges, that is, 8:1, 4:1, 2:1, 1:1 respectively This is the Law of Diminishing MRS.
  • 18. An indifference map is a complete set of indifference curves.  It indicates the consumer’s preferences among all combinations of goods and services.  The farther from the origin the indifference curve is, the more the combinations of goods along that curve are preferred.
  • 20.  Indifference curves are negatively sloped Given a combination of commodity X and commodity Y, with every increase in X, the amount in Y should fall in order that the level of satisfaction from every combination should remain the same.  Indifference curves are convex to the origin Convexity illustrates the law of diminishing marginal rate of substitution.  Indifference curves can never intersect each other Indifference curves can never intersect each other because each indifference curve represents a specific level of satisfaction. If two indifference curves intersect each other, then at the point of intersection, the consumer is experiencing two different levels of utility.
  • 21. A consumer seeks a market basket that generates the maximum level of happiness. However, one’s money income and prices of goods imposes a limit on the level of satisfaction that one may attain. Thus, the income at the disposal of the consumer in conjunction with prices of the commodities will determine the budgetary constraint or the price line.
  • 22. Consumer equilibrium is attained when, given his budget constraint, the consumer reaches the highest possible point on the indifference curve. The maximum satisfaction is yielded when the consumer reaches equilibrium at the point of tangency between an indifference curve and the price line. At point E, the price line is tangent to the indifference curve.  At the equilibrium point, slope of indifference curve = slope of price line  slope of indifference curve = MRS  slope of price line = PX / PY  Thus, at point E, MRS = PX / PY  Thus, satisfaction is maximized when the marginal rate of substitution of X for Y is just equal to the price of X to the price of Y.