2. Constructing an indifference curve a Pears Oranges Pears 30 24 20 14 10 8 6 Oranges 6 7 8 10 13 15 20 Point a b c d e f g

4. More of a commodity is better than less

5. Preference of a consumer are transitive

8. Deriving the marginal rate of substitution ( MRS ) a b Units of good Y Units of good X 26 6 7

9. Deriving the marginal rate of substitution ( MRS ) a b Units of good Y Units of good X 26 6 7  Y = 4  X = 1 MRS = 4

10. Deriving the marginal rate of substitution ( MRS ) a b Units of good Y Units of good X 26 6 7 c d  Y = 4  X = 1  Y = 1  X = 1 MRS = 1 MRS = 4 13 14 9

15. An indifference map Units of good Y Units of good X I 1 I 2 I 3 I 4 I 5

19. A budget line Units of good Y Units of good X a b Units of good X 0 5 10 15 Units of good Y 30 20 10 0 Point on budget line a b Assumptions P X = £2 P Y = £1 Budget = £30

20. Effect of an increase in income on the budget line Units of good Y Units of good X Assumptions P X = £2 P Y = £1 Budget = £40 16 7 m n Budget = £40 Budget = £30

21. Effect on the budget line of a fall in the price of good X Units of good Y Units of good X Assumptions P X = £1 P Y = £1 Budget = £30 B 1 B 2 a b c

25. The Best Affordable Bundle

26. 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. indifference curve and budget line I 1 I 2 I 3 I 4 I 5 Units of good Y O Units of good X r s t Y 1 X 1 v u

28. Units of good Y O Units of good X B 1 Effect on consumption of a change in income I 1

29. I 2 Units of good Y O Units of good X B 1 B 2 I 1 Effect on consumption of a change in income

30. I 2 Units of good Y O Units of good X B 1 B 2 B 3 B 4 I 1 I 3 I 4 Effect on consumption of a change in income

31. I 2 Units of good Y O Units of good X B 1 B 2 B 3 B 4 I 1 I 3 I 4 Income–consumption curve Effect on consumption of a change in income

33. Deriving an Engel curve from an income–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 Income-consumption curve Bread Income (£) CDs CDs Q b 3 Q b 2 Q b 1 Y 3 Y 2 Y 1 Q cd 3 Q cd 2 Q cd 1 Q cd 3 Q cd 2 Q cd 1 a b c a b c

34. Deriving an Engel curve from an income–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 Income-consumption curve Bread Income (£) CDs CDs Q b 3 Q b 2 Q b 1 Y 3 Y 2 Y 1 Q cd 3 Q cd 2 Q cd 1 Q cd 3 Q cd 2 Q cd 1 Engel curve a b c a b c

35. Engel Curves Food (units per month) 30 4 8 12 10 Income ($ per month) 20 16 0 Engel curve slopes upward for a normal good.

36. Engel Curves Food (units per month) 30 4 8 12 10 Income ($ per month) 20 16 0 Engel curve is backward bending for inferior goods. Inferior Normal

37. Effect of a rise in income on the demand for an inferior good Units of good Y (normal good) Units of good X (inferior good) O I 1 B 1 a

38. Effect of a rise in income on the demand for an inferior good Units of good Y (normal good) Units of good X (inferior good) O I 2 I 1 B 1 B 2 a b

39. Effect of a rise in income on the demand for an inferior good Units of good Y (normal good) Units of good X (inferior good) O Income–consumption curve I 2 I 1 B 1 B 2 a b

40. Effect of a fall in the price of good X Units of good Y Units of good X Assumptions P X = £2 P Y = £1 Budget = £30 B 1 I 1 j

41. Effect of a fall in the price of good X Units of good Y Units of good X Assumptions P X = £1 P Y = £1 Budget = £30 B 1 I 1 j I 2 B 2 k a

42. Effect of a fall in the price of good X Units of good Y Units of good X B 1 I 1 j I 2 B 2 k Price–consumption curve a

43. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a b c d Further falls in the price of X

44. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a Price - consumption curve b c d

45. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a Price - consumption curve b c d Price of good X Units of good X a b P 1 P 2 Q 1 Q 2

46. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a Price - consumption curve b c d Price of good X Units of good X a b c d P 1 P 2 P 3 P 4 Q 1 Q 2 Q 3 Q 4

47. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a Price - consumption curve b c d Price of good X Units of good X a b c d Demand P 1 P 2 P 3 P 4 Q 1 Q 2 Q 3 Q 4

51. Response to an income increase: both goods normal C F 100 20 U 1 B 35

52. Income effects C F 100 20 U 1 B 35 F Normal; C inferior C Normal; F inferior Both F and C Normal

54. Decomposing the price change

56. Prices Drop

62. Income and Substitution Effects Illustrated: The Normal-Good Case [Figure 4.3]

64. Income and Substitution Effects: Normal Good Food (units per month) O Clothing (units per month) R F 1 S C 1 A U 1 The income effect, EF 2 , ( from D to B ) keeps relative prices constant but increases purchasing power . Income Effect C 2 F 2 T U 2 B When the price of food falls, consumption increases by F 1 F 2 as the consumer moves from A to B. E Total Effect Substitution Effect D The substitution effect, F 1 E, (from point A to D ) , changes the relative prices but keeps real income (satisfaction) constant.