HIERARCHY OF

INDIFFERENCE CURVE

Indifference Curveshows combination of two goods that give the consumer equal satisfaction and utility.

Hierarchy of Indifference CurveConsists of infinite indifference curves as there are infinite levels of utility (Satisfaction).

Clothing

Food

Hierarchy of Indifference Curve

BUDGET LINE AND THEOPTIMUM

COMBINATION

Contains infinite points of combinations of the commodity items that

a particular budget can buy at given

prices.

Expressed Quantitatively as:

B = (Pf) (Qf) + (Pc) (Qc)

Max Qf = Max for f (food)

Max Qc = Max for c (clothing)

Budget = P 500 Budget = P 1,000 Budget = P 1,500

Food Clothing Food Clothin

g Food Clothing

10 0 20 0 40 0

8 1 16 2 32 4

6 2 12 4 24 8

4 3 8 6 16 12

2 4 4 8 8 16

0 5 0 10 0 20

Hierarchy of Budget Schedules

Hierarchy of Budget LineFo

od

Clothing

One Property is the constant rate of substitution between

the commodity variables from any point to another

along the budget line.

The other property exhibits the budget lines as a

parallel to one another in the hierarchy.

Two important properties of budget Line:

OPTIMUMCOMBINATION

shows what a consumer can afford to have that

much satisfaction.

Optimum Combination

DynamicsThe world is not static and

so is consumption which can change due to the consumer or the goods themselves.

B

A Q

B1

B2Food

Con

sum

ptio

n

Clothing Consumption

Relative Prices

B

AI1

I2

Food

Con

sum

ptio

n

Clothing Consumption

Relative preference