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    Presentation Indifference Curve and Budget Line

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    Antony Saputra

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    Presentation Indifference Curve and Budget Line

    Uploaded by

    Antony Saputra
    8 views10 pages

    Copyright

    © © All Rights Reserved

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    PPTX, PDF, TXT or read online from Scribd

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    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    8 views10 pages

    Presentation Indifference Curve and Budget Line

    Uploaded by

    Antony Saputra

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 10

    Indifference Curve and

    Budget Line
    In this Chapter What You will Get ?

    1.Define the meaning of an indiference curve and a budget


    line
    2.Explain the causes of a shift in the budget line
    3.Analyse the income, subtitution and price effect for
    normal, inferior and giften goods
    4.Evaluate the limitations of the modal of indifference curve
    What Is Indifference Curve
    Indifference Curve is Curve show all of the combinations of two goods that give a
    consumer equal satisfaction or utility

    Note:
    1. Indifference curves cannot cross each other as this
    would be where a consumer was being iirational in
    the choices.
    2. Higher indifferences curve represents higher levels
    of satisfaction.
    Good Y

    3. All curves slope more steeply from left to right.

    I3
    I2
    I1
    0 Good X
    Budget Line
    • A budget line shows all possible combination of two commodities that could be
    pursued with a given amount of income.
    • straight line that slope downwards
    • The budget line, also known as the budget constrain
    • The equation of the budget line equation can be represented as follows:

    M = Px × Qx + Py × Qy
    • Where,
    Px = cost of product X.
    Qx = the quantity of product X.
    Py = cost of product Y.
    Qy = quantity of product Y.
    M = consumer’s income.
    Budget schedule
    Cream biscuit
    Combination (@ ₹10 per Plain biscuit Budget allocation
    packet) (@ ₹5 per packet)

    A 0 10 10 × 0 + 5 × 10 =
    50

    B 1 8 10 × 1 + 5 × 8 = 50

    C 2 6 10 × 2 + 5 × 6 = 50

    D 3 4 10 × 3 + 5 × 4 = 50

    E 4 2 10 × 4 + 5 × 2 = 50

    F 5 0 10 × 5 + 5 × 0 = 50
    Change in budget line
    • 1. Change in income

    Increase lead to parallel outward shift

    Decrease lead to parallel inward shift

    • 2. Change in price-

    A decrease in price of goods X rotate the


    line counter clockwise.

    Increase in price of goods X rotate the


    line clockwise.
    The Income and Subsitution effect of price change (Normal Good)

    Note:
    1. Income Effect and Subtitution effect have a Positive
    2. When the price of a normal good decreases, the budget
    line moves from “XY” to “XZ”. The new Equilibrium
    Point is at E2, where the new budget line “XZ” is
    tangent to the indifference curve I2.
    3. The change in quantity demanded due to a decrease in
    price is the difference between B1 and B2 (Price
    Effect)
    4. The difference between B1 and B3 is a substitution
    effect because the income effect has been offset.
    5. The income effect can be obtained by subtracting the
    substitution effect from the price effect or the same as
    the difference B2 and B3.
    The Income and Subsitution effect of price change (Inferior Good)

    Note:
    1. Income Effect is negative but not enough to outweight
    the subtitution effect (Positive)
    2. Price Effect is Positive the difference between B2 and
    B1 (Price Effect)
    3. The difference between B1 and B3 is a substitution
    effect because the income effect has been offset.
    4. The income effect can be obtained by subtracting the
    substitution effect from the price effect or the same as
    the difference B3 and B2.
    The Income and Subsitution effect of price change (Giffen Good)

    Note:
    1. A Giffen good is a type of inferior good where the
    quantity demanded falls when the price falls;
    2. the quantity demanded increases as price increases.
    3. This means that the income effect is negative but is
    greater than the substitution effect
    Limitation of the model of indifference curve

    The Indifference curve model aims to provide a simple


    representatio of reality:
    1. In reality, consumer have to choose from many more
    goods than just two
    2. The term “Indifference” Implies that consumers are
    willing to accept any combinationof the two goods
    as represented by an indifference curve
    3. Indifference curve assume that consumer act
    rationally.

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