1 / 43

INDIFFERENCE ANALYSIS

INDIFFERENCE ANALYSIS. Indifference curves constructing an indifference curve the shape of an indifference curve diminishing marginal rate of substitution an indifference map The budget line constructing a budget line effect of a change in income effect of a change in price.

brooklyn
Download Presentation

INDIFFERENCE ANALYSIS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. INDIFFERENCE ANALYSIS • Indifference curves • constructing an indifference curve • the shape of an indifference curve • diminishing marginal rate of substitution • an indifference map • The budget line • constructing a budget line • effect of a change in income • effect of a change in price

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

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

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

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

  6. An indifference map Units of good Y I5 I4 I3 I2 I1 Units of good X

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

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

  9. Effect on the budget line of a fall in the price of good X a Assumptions PX = £1 PY = £1 Budget = £30 Units of good Y B2 B1 c b Units of good X

  10. INDIFFERENCE ANALYSIS • The optimum consumption point • equating the marginal rate of substitution with the price ratio • The effect of a change in income • the income–consumption curve • the Engel curve • income elasticity of demand and the income–consumption curve • the effect of a rise in income on the demand for an inferior good

  11. Finding the optimum consumption Units of good Y Budget line I5 I4 I3 I2 I1 O Units of good X

  12. Same slope at t of indifference curve and budget line r s Units of good Y t Y1 u I5 I4 v I3 I2 I1 O X1 Units of good X

  13. Effect on consumption of a change in income Units of good Y B1 I1 O Units of good X

  14. Effect on consumption of a change in income Units of good Y I2 B2 B1 I1 O Units of good X

  15. Effect on consumption of a change in income Units of good Y I4 I3 I2 B2 B3 B1 B4 I1 O Units of good X

  16. Effect on consumption of a change in income Income–consumption curve Units of good Y I4 I3 I2 B2 B3 B1 B4 I1 O Units of good X

  17. Deriving an Engel curve from an income–consumption curve Bread Income-consumption curve Qb3 c Qb2 b a Qb1 I3 I2 I1 B3 B2 B1 Qcd2 Qcd1 Qcd3 CDs Y3 c Income (£) Y2 b Y1 a Qcd1 Qcd2 Qcd3 CDs

  18. Deriving an Engel curve from an income–consumption curve Bread Income-consumption curve Qb3 c Qb2 b a Qb1 I3 I2 I1 B3 B2 B1 Qcd2 Qcd1 Qcd3 CDs Engel curve Y3 c Income (£) Y2 b Y1 a Qcd1 Qcd2 Qcd3 CDs

  19. Effect of a rise in income on the demand for an inferior good Units of good Y (normal good) a I1 B1 O Units of good X (inferior good)

  20. Effect of a rise in income on the demand for an inferior good b Units of good Y (normal good) I2 a I1 B1 B2 O Units of good X (inferior good)

  21. Effect of a rise in income on the demand for an inferior good Income–consumption curve b Units of good Y (normal good) I2 a I1 B1 B2 O Units of good X (inferior good)

  22. Effect of a fall in the price of good X Assumptions PX = £2 PY = £1 Budget = £30 Units of good Y j I1 B1 Units of good X

  23. Effect of a fall in the price of good X a Assumptions PX = £1 PY = £1 Budget = £30 k Units of good Y j I2 I1 B1 B2 Units of good X

  24. Effect of a fall in the price of good X a Price–consumption curve k Units of good Y j I2 I1 B1 B2 Units of good X

  25. Deriving a demand curve from a price–consumption curve Further falls in the price of X a b Expenditure on all other goods c d I4 I3 I2 I1 B4 B3 B1 B2 Units of good X

  26. Deriving a demand curve from a price–consumption curve a Price-consumption curve b Expenditure on all other goods c d I4 I3 I2 I1 B4 B3 B1 B2 Units of good X

  27. Deriving a demand curve from a price–consumption curve a Price-consumption curve b Expenditure on all other goods c d I4 I3 I2 I1 B4 B3 B1 B2 Units of good X a P1 Price of good X b P2 Q1 Q2 Units of good X

  28. Deriving a demand curve from a price–consumption curve a Price-consumption curve b Expenditure on all other goods c d I4 I3 I2 I1 B4 B3 B1 B2 Units of good X a P1 Price of good X b P2 c P3 d P4 Q1 Q3 Q4 Q2 Units of good X

  29. Deriving a demand curve from a price–consumption curve a Price-consumption curve b Expenditure on all other goods c d I4 I3 I2 I1 B4 B3 B1 B2 Units of good X a P1 Price of good X b P2 c P3 d P4 Demand Q1 Q3 Q4 Q2 Units of good X

  30. INDIFFERENCEANALYSIS • The effect of changes in price • the price–consumption curve • deriving the individual's demand curve • Income and substitution effects of a price change • a normal good • an inferior good • a Giffen good (a special type of inferior good)

  31. Income and substitution effects: normal good Units of good Y f I1 I2 I3 I4 I5 B1 I6 QX1 Units of Good X Units of Good X

  32. Income and substitution effects: normal good Rise in the price of good X h Units of good Y f I1 I2 I3 I4 I5 B2 B1 I6 QX3 QX1 Units of Good X Units of Good X

  33. Income and substitution effects: normal good Substitution effect of the price rise g h Units of good Y f I1 I2 I3 I4 I5 B2 B1a B1 I6 QX1 QX2 Substitution effect Units of Good X Units of Good X

  34. Income and substitution effects: normal good Income effect of the price rise g h Units of good Y f I1 I2 I3 I4 I5 B2 B1a B1 I6 QX3 QX1 QX2 Substitution effect Income effect Units of Good X Units of Good X

  35. Income and substitution effects: Inferior (non-Giffen) good Units of Good Y Units of good Y f I1 I2 B1 QX1 Units of Good X Units of Good X

  36. Income and substitution effects: Inferior (non-Giffen) good Units of Good Y Rise in the price of good X Units of good Y f h I1 I2 B2 B1 QX3 QX1 Units of Good X Units of Good X

  37. Income and substitution effects: Inferior (non-Giffen) good Units of Good Y Substitution effect of the price rise g Units of good Y f h I1 I2 B2 B1a B1 QX1 QX2 Substitution effect Units of Good X Units of Good X

  38. Income and substitution effects: Inferior (non-Giffen) good Units of Good Y Income effect of the price rise g Units of good Y f h I1 I2 B2 B1a B1 QX3 QX1 QX2 Substitution effect Units of Good X Units of Good X Income effect

  39. Income and substitution effects: Giffen good Units of Good Y f Units of good Y I1 B1 I2 QX1 Units of Good X Units of Good X

  40. Income and substitution effects: Giffen good Units of Good Y Rise in the price of good X f Units of good Y I1 h B2 B1 I2 QX3 QX1 Units of Good X Units of Good X

  41. Income and substitution effects: Giffen good Units of Good Y Substitution effect of the price rise g f Units of good Y I1 h B1a B2 B1 I2 QX3 QX1 QX2 Substitution effect Units of Good X Units of Good X

  42. Income and substitution effects: Giffen good Units of Good Y Income effect of the price rise g f Units of good Y I1 h B1a B2 B1 I2 QX3 QX1 QX2 Substitution effect Units of Good X Units of Good X Income effect

  43. INDIFFERENCE ANALYSIS • The effect of a change in price on the demand for other goods • The usefulness of indifference analysis • superiority of using ordinal measures • limitations of indifference analysis

More Related