10B11PD311 Economics. B, Burgers 302515 Z, Pizzas per semester 25 20 15 10 0 d a b e c f.

10B11PD311 Economics


B , Burgers

302515Z , Pizzas per semester

25

20

15

10

0

da

b

e

c

f


Individuals can rank their preferences

Non-satiation - people prefer more to less

Transitivity - rankings are consistent

Individuals are willing to give up successfully smaller amounts of one good in order to get additional units of other goods


Bundles of Pizzas and Burgers a consumer might consume

B, Burgersper semester Indifference Curve

302515

Z, Pizzas per semester

25

20

15

10

0

da

bI

e

c

f

Individuals can rank their preferences

Non-satiation - people prefer more to less

Transitivity - rankings are consistent

Individuals are willing to give up successfully smaller amounts of one good in order to get additional units of other goods


Preference MapB , Burgers

per semester

302515Z , Pizzas per semester

25

20

15

10

0

d

I0

I 1

I 2e

c

fIndifference curve on the right means greater satisfaction

Bundles of Pizzas and Burgers a consumer might consume


Impossible Indifference Curves

B, Burgersper semester

Crossing


I1

I0a

be

Violation of Transitivity




Upward Sloping


I

a

b




a

b

Thick


I

No two points can have same satisfaction level


Indifference curves (IC) are downward sloping Convex to the origin do not intersect

Higher IC reflect greater level of satisfaction

Properties of Indifference Curves


Pizzas

Burg

ers

Slope of IC is called Marginal Rate of Substitution. It denotes rate at which an individual is willing to trade two goods/ services

MUz * ΔZ = -(MUB * ΔB) ΔB/ ΔZ = -(MUz /MUB)


Budget ConstraintB, Burgers

per semester

Opportunity set

50 = M /pZ

L1 (pZ = $1, PB = $2, M = $50)

25 = M /pB

20

10

100 30


a

b

c

d


M PZQZ + PBQB

QZ = M/PZ - PB/PZ*QB

QB = M/PB - PZ/PB*QZ

Slope = - PZ/PB


Changes in the Budget Constraint


Price of Pizza Doubles

50

L1 (pZ = $1)

25

0




B, Burgersper semester Price of Pizza Doubles

Loss

50

L1 (pZ = $1)

L2 (pZ = $2)

25

250




B, Burgersper semester Income Doubles

L1 (M = $50)

25

500




B, Burgersper semester Income Doubles

Gain

100

L3 (M = $100)

L1 (M = $50)

50

25

500



Consumer Equilibrium is attained when maximum satisfaction is obtained from given choices-

Utility Maximization




Budget line

10

20

25

5030100


I1d

c

a

g

A

B




Budget line

10

20

25

5030100Z, Pizzas per semester

I1I2I3

d

fc

e

a

g

A

B


Deriving an Individual’s Demand Curve

5.2

12.0

0

L3 (pb = $4)

e3

I 3

B

Price-consumption curve

A

58.9



4.3

5.2

12.0

0

L 2 ( pb

= $6) L 3 ( pb = $4)

e3

e2

I 2

I 3

B


A

44.5 58.9

As Price of B increases from $4 to $6, consumer shifts to lower IC



4.3

5.2

12.0

2.8

0

L 1 ( pb

= $12) L 2 ( pb

= $6) L 3 ( pb = $4)

e3

e2

e1

I 1

I 2

I 3

B


A

26.7 44.5 58.9


4.3

5.2

12.0

2.8

12.0

6.0

4.0

26.70 44.5 58.9

L1 (pb = $12)

pb, $ per unit

L2 (pb = $6) L3 (pb = $4)

26.70 44.5 58.9

e3

e2

e1

E3

E2

E1

I 1

I2

I 3


(a) Indifference Curves and Budget Constraints

(b) Demand Curve


B

A

B


4.3

5.2

12.0

2.8

12.0

6.0

4.0

26.70 44.5 58.9

L1 (pb = $12)

pb, $ per unit

L2 (pb = $6) L3 (pb = $4)

26.70 44.5 58.9

e3e2

e1

E3

E2

E1

I1

I2I3

D1, Demand for B


(a) Indifference Curves and Budget Constraints

(b) Demand Curve


B

A

B


X

Y

CONSUMER CHOICE AND CHANGE IN DEMAND

O

SUBSTITUTION EFFECT

E


X

Y Y

X


O

SUBSTITUTION EFFECT

E


X

Y Y

X


O

O`

SUBSTITUTION EFFECT

E

F

On the same IC, consumer shifts up & down by substituting one in place of another


INCOME EFFECT

X

Y

G

F

N


INCOME EFFECT

X

Y

G’

G

F F’

M

N

Consumer shifts to higher IC


12.0

0 20 30

L1

e1

Price Effect with Normal Goods Y


12.0

0 7520 30

Price effect

I 2I1

L2

L1

e2

e1

Price Effect with Normal Goods Y

X

e3

10B11PD311 Economics. B, Burgers 302515 Z, Pizzas per semester 25 20 15 10 0 d a b e c f.

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10B11PD311 Economics. B, Burgers 302515 Z, Pizzas per semester 25 20 15 10 0 d a b e c f.