indifference analysis 2
TRANSCRIPT
Indifference Indifference Analysis Analysis
Indifference analysis
Effects of achange in income
I2
Uni
ts o
f goo
d Y
OUnits of good X
Y1 Y2 Y3 Y4 I1
I3I4
Income-consumption curve
Effect on consumption of a change in income
Y1 Y2 Y3
I3I2I1
Income-consumptioncurveB
read
Inco
me
(Rs.
)
CDs
CDs
Qb3Qb2Qb1
Y3
Y2
Y1
Qcd3Qcd2Qcd1
Qcd3Qcd2
Qcd1
Engel curve
ab
c
ab
c
Deriving an Engel curve from an income-consumption curve
Uni
ts o
f goo
d Y
(nor
mal
goo
d)
O
Income-consumption curve
I2
I1B1 B2
a
b
Units of good X(inferior good)
Effect of a rise in income on the demand for an inferior good
The income–consumption curve shows how consumption
varies with income.
Indifference analysis
Effects of achange in price
Uni
ts o
f goo
d Y
Units of good X
Assumptions
PX = Rs.2PY = Rs.1
Budget = Rs.30
B1 I10
10
20
30
0 5 10 15 20 25 30
j
Effect of a fall in the price of good X
Uni
ts o
f goo
d Y
Units of good X
Assumptions
PX = Rs.1PY = Rs.1
Budget = Rs.30
B1 I1 B2
a
j
0
10
20
30
0 5 10 15 20 25 30
I2
k
Effect of a fall in the price of good X
The price–consumption curve shows how
consumption is affected by a change in the price of one of the two goods
Price-consumption curve
Deriving a demand curve from a price-consumption curve
B1 B2 B3
I3I2I1
I4
B4
Exp
endi
ture
on
all o
ther
goo
ds
Units of good X
a Price-consumptioncurve
bc d
Pric
e of
goo
d X
Units of good X
a
Demand
P1
P2
P3P4
Q1 Q2 Q3 Q4
b
cd
As the price of X falls, the budget
line swings outwards.
Indifference analysis
Income and substitution effects of
a change in price:(a) normal good
Uni
ts o
f goo
d Y
I1
I2B1
f
QX1
Income and substitution effects: normal good
Units of Good X
Y1
Uni
ts o
f goo
d Y
I1
I2B2
h
B1
QX1
f
Rise in the price of good X
Income and substitution effects: normal good
Units of Good XQX3
Y3
Y1
Uni
ts o
f goo
d Y
B2
Substitutioneffect
B1
QX1
h
f
I1
I2QX2
B1a
Substitution effectof the price rise
g
Income and substitution effects: normal good
Units of Good XQX3
Y3
Y2
Y1
Units of Good X
Uni
ts o
f goo
d Y
I1
I2
Substitutioneffect
Income
effect
QX1
h
f
g
B2 B1
QX2QX3
B1a
Income effect ofthe price rise
Income and substitution effects: normal good
Y3
Y2
Y1
Indifference analysis
Income and substitution effects of
a change in price:(b) inferior good
Units of inferior Good X
Uni
ts o
f goo
d Y
B1
Income and substitution effects: Inferior (non-Giffen) good
f
QX1
I1
I2
Units of inferior Good X
Uni
ts o
f goo
d Y
f
QX1
B2
QX3
I1
I2
Rise in the price of good X
h
B1
Income and substitution effects: Inferior (non-Giffen) good
Units of inferior Good X
Uni
ts o
f goo
d Y
f
QX1
B2
h
QX2
I1
I2
Substitution effect
B1a
Substitution effectof the price rise
B1
Income and substitution effects: Inferior (non-Giffen) good
g
QX3
Uni
ts o
f goo
d Y
f
QX1
B2
g
QX2QX3
I1
I2
Substitution effect
h
Income effect
B1a
Income effect ofthe price rise
B1
Income and substitution effects: Inferior (non-Giffen) good
A positive income effect: a rise in price partially offsetting the fall in consumption.
Units of inferior Good X
Indifference analysis
Income and substitution effects of
a change in price:(c) Giffen good
Units of Giffen Good X
Uni
ts o
f goo
d Y
B1
Income and substitution effects: Giffen good
f
QX1
I1
I2
Units of Giffen Good X
Uni
ts o
f goo
d Y
f
QX1
B2
QX3
I1
I2
Rise in the price of good X
h
B1
Income and substitution effects: Giffen good
Units of Giffen Good X
Uni
ts o
f goo
d Y
f
QX1
B2
h
QX3
I1
I2QX2
B1a
g
Substitution effect
Substitution effectof the price rise
B1
Income and substitution effects: Giffen good
Units of Giffen Good X
Uni
ts o
f goo
d Y
f
QX1
B2
h
QX3
I1
I2
g
QX2Substitution effect
Income effect
Income effect ofthe price rise
B1
Income and substitution effects: Giffen good
B1a
A positive income effect that is bigger than the negative
substitution effect. A rise in price causes a rise in consumption.