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Introduction Indifference map is: Qx Qy U1U1 U2U2 U3U3 0 § a diagram consists of a set of indifference curves which shows the ranking of preference.

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Presentation on theme: "Introduction Indifference map is: Qx Qy U1U1 U2U2 U3U3 0 § a diagram consists of a set of indifference curves which shows the ranking of preference."— Presentation transcript:

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3 Introduction Indifference map is: Qx Qy U1U1 U2U2 U3U3 0 § a diagram consists of a set of indifference curves which shows the ranking of preference § We use arrows to show preference direction § §the innermost IC has the highest utility while the outermost has the lowest utility U3>U2>U1

4 Introduction- (contd) Indifference curves can be used to illustrate a number of economic concepts like perfect substitutes, perfect complements and bads.

5 Case 1-a good-good situation Good is something people prefer some to none. apple banana U1 U3 U2 0 We assume good x to be apple and y to be banana. Ò the IC farther to the right shows the higher levels of utility as we prefer more of both goods. Ò In this case, the indifference curves are downward sloping and the arrows show preference direction. U3>U2>U1

6 Case 2 -a bad-good situation Opposite to good, bad is something people prefer less to more. We assume x to be noise pollution (bad) and y to be silence (good). Noise pollution silence U3 U2 U1 0 ICs are upward sloping The arrow points left means a smaller amount of noise will lead to higher utility. The arrow points up means a greater amount of silence will lead to higher utility U3>U2>U1

7 Case 3 -a good-bad situation A case similar to case 2 we assume x is silence (good) and y is noise pollution (bad) this time Noise pollution silence U3 U2 U1 0 ICs are upward sloping Arrow pointing down means a smaller amount of noise brings higher utility Arrow pointing right means a greater amount of silence brings higher utility U3>U2>U1

8 Case4 -a bad-bad situation /we assume x is rubbish and y is noise pollution /As they are both bad, this means that we would prefer less of these things Noise pollution U3 U2 U1 0 rubbish ICs are downward sloping and concave to origin / /Arrow pointing down means a smaller amount of noise brings higher utility / /Arrow pointing left means a smaller amount of rubbish brings higher utility U3>U2>U1

9 Case5 -x is good, y is neuter Neuter is something which a person is indifferent to having, and does not care to have any or none, more or less. U1U2U3 dress trousers 0 IC are parallel vertical lines and the arrow shows the preference direction in this case, we assume that x is good and y is neuter. To a man,trousers are good and dresses are neuter. § § For a fixed quantity of trousers,a greater amount of dresses will not affect utility. IC on the right represent a greater quantity of trousers,so utility is higher. U3>U2>U1

10 Case6 -x is neuter, y is good § Similar to case 5 § in this case, x is neuter and y is good. The assumption is that for a man, trousers are a good and dresses are a neuter. trousers dresse s0 U1 U2U2U2U2 U3U3U3U3 U3>U2>U1

11 Case7 -x is bad, y is neuter õIn this case, we assume that x is bad and y is neuter. Bones(bad) meat U1 0 Õ To a vegetarian, meat is a neuter as he is indifferent to have any, but the bone of the meat is rubbish and is regarded as bad. Õ The greater quantity of neuter will not affect the level of utility § § Arrow pointing to the left means a smaller quantity of bad leads to a higher utility U3>U2>U1 U2U3

12 Case8 -x is neuter, y is bad TSimilar to case 7 TIn this case, we assume that x is neuter and y is bad. There is still a vegetarian who does not care about having any meat but would not prefer to have any bones as they are waste. TArrow pointing down means a smaller quantity of bad leads to higher utility Bones(bad) meat U1 0U3>U2>U1 U2 U3

13 Case9 -perfect substitutes Perfect substitutes are two goods that can be substitutable at a fixed ratio.(eg. 1:1) 0 Japans beef Englands beef M Therefore, MRS is constant, i.e. 1. M If 4 units of Englands beef is exchanged for 4 units of Japans beef, utility is constant. M Based on the same MRS, 5 units of Englands beef will be exchanged for 5 units of Japans beef, and utility is constant. U1 U1 U2 U2 U3 U3

14 Case10 -perfect complements Perfect complements are two goods that have to be used together in a fixed proportions. Here, we will use the left sock and right sock to be our examples. Compare points A,B,and C To have 2 left socks and 1 right sock or to have 2 right socks and 1 left sock will not provide a higher utility than 1 left sock and 1 right sock Similarly, to have 2 left socks and 3 right socks or 3 left socks and 2 right sock will not provide a higher utility than 2 left socks and 2 right socks. 0 Right sock Left sock ICs are L-shaped and the turning point of IC shows the ratio of the two complement goods to be used together A B C U1 U1 U2 U2

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