1. Indifference Analysis

2. Indifference analysis
Indifference curves

3. Constructing an indifference curve
Pears
Oranges
Point 30 24 20 14 10 8 6 6 7 8 10 13 15 20 a b c d e f g
Combinations of pears and
oranges that Clive likes
the same amount as
10 pears and 13 oranges

4. Constructing an indifference curve
Pears
Oranges
Point 30 24 20 14 10 8 6 6 7 8 10 13 15 20 a b c d e f g
Pears
Oranges

5. Constructing an indifference curve
Pears
Oranges
Point 30 24 20 14 10 8 6 6 7 8 10 13 15 20 a b c d e f g
Pears
Oranges

6. Constructing an indifference curve
Pears
Oranges
Point b 30 24 20 14 10 8 6 6 7 8 10 13 15 20 a b c d e f g
Pears
Oranges

7. Constructing an indifference curve
Pears
Oranges
Point b 30 24 20 14 10 8 6 6 7 8 10 13 15 20 a b c d e f g c
Pears d e f g
Oranges

8. Deriving the marginal rate of substitution (MRS)6
MRS = 4
DY = 4 26 7 b
DX = 1
MRS = Y/X
Units of good Y
Units of good X

9. Deriving the marginal rate of substitution (MRS)
DY = 4 26 b
DX = 1
MRS = Y/X
Units of good Y
MRS = 1 c
DY = 1 d 13 14 9
DX = 1 6 7
Units of good X

10. An indifference map I4 I5 I2 I3 I1
Units of good Y
Units of good X

11. The impossibility of two indifference curves crossing
Units of good Y a b I1
Units of good X

12. The impossibility of two indifference curves crossing
Units of good Y a b I2 I1
Units of good X

13. The impossibility of two indifference curves crossing
Units of good Y a c b I2 I1
Units of good X

14. Indifference analysis
Budget lines

15. A budget line Units of good X 5 10 15 Units of good Y 30 20 105 10 15
Units of
good Y 30 20 10
Assumptions
PX = £2
PY = £1
Budget = £30

16. A budget line a Units of good Y Units of good X Units of good X 5 105 10 15
Point on
budget line a
Units of
good Y 30 20 10
Units of good Y
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good X

17. A budget line a b Units of good Y Units of good X Units of good X 5 105 10 15
Units of
good Y 30 20 10
Point on
budget line a b b
Units of good Y
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good X

18. A budget line a b Units of good Y c Units of good X Units of good X 55 10 15
Units of
good Y 30 20 10
Point on
budget line a b c b
Units of good Y c
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good X

19. A budget line a b Units of good Y c d Units of good X Units of good X5 10 15
Units of
good Y 30 20 10
Point on
budget line a b c d b
Units of good Y c
Assumptions
PX = £2
PY = £1
Budget = £30 d
Units of good X

20. Effect of an increase in income on the budget line
Units of good Y
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good X

21. Effect of an increase in income on the budget line
Assumptions
PX = £2
PY = £1
Budget = £40
Units of good Y n m 16 7
Budget
= £40
Budget
= £30
Units of good X

22. Effect on the budget line of a fall in the price of good X
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good Y
Units of good X

23. Effect on the budget line of a fall in the price of good X
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good Y
Units of good X

24. Effect on the budget line of a fall in the price of good X
Assumptions
PX = £1
PY = £1
Budget = £30
Units of good Y
Units of good X

25. Effect on the budget line of a fall in the price of good X
Assumptions
PX = £1
PY = £1
Budget = £30
Units of good Y B2 B1 b c
Units of good X

26. Indifference analysis
The optimal level
of consumption

27. Finding the optimum consumption
Units of good Y O
Units of good X

28. Finding the optimum consumption
Units of good Y I5 I4 I3 I2 I1 O
Units of good X

29. Finding the optimum consumption
Units of good Y
Budget line I5 I4 I3 I2 I1 O
Units of good X

30. Finding the optimum consumptionr v s u
Units of good Y t Y1 X1 I5 I4 I3 I2 I1 O
Units of good X

31. Indifference analysis
Effects of a
change in income

32. Effect on consumption of a change in income
Units of good Y a B1 I1 O
Units of good X

33. Effect on consumption of a change in income
Units of good Y I2 B1 B2 I1 O
Units of good X

34. Effect on consumption of a change in income
Units of good Y I4 I3 I2 B1 B2 B3 B4 I1 O
Units of good X

35. Effect on consumption of a change in income
Income-consumption curve
Units of good Y I4 I3 I2 B1 B2 B3 B4 I1 O
Units of good X

36. Deriving an Engel curve from an income-consumption curve
Bread I3 I2 I1 B1 B2 B3
CDs

37. Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption
curve I3 I2 I1 B1 B2 B3
CDs

38. Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption
curve I3 I2 I1 B1 B2 B3
CDs
Income (£)
CDs

39. Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption
curve
Qb1 a I3 I2 I1 B1 B2 B3
Qcd1
CDs
Income (£)
CDs

40. Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption
curve
Qb1 a I3 I2 I1 B1 B2 B3
Qcd1
CDs
Income (£) Y1 a
Qcd1
CDs

41. Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption
curve
Qb2 b
Qb1 a I3 I2 I1 B1 B2 B3
Qcd1
Qcd2
CDs
Income (£) Y2 b Y1 a
Qcd1
Qcd2
CDs

42. Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption
curve
Qb3 c
Qb2 b
Qb1 a I3 I2 I1 B1 B2 B3
Qcd1
Qcd2
Qcd3
CDs Y3 c
Income (£) Y2 b Y1 a
Qcd1
Qcd2
Qcd3
CDs

43. Deriving an Engel curve from an income-consumption curve
Bread
Income-consumption
curve
Qb3 c
Qb2 b
Qb1 a I3 I2 I1 B1 B2 B3
Qcd1
Qcd2
Qcd3
CDs
Engel curve Y3 c
Income (£) Y2 b Y1 a
Qcd1
Qcd2
Qcd3
CDs

44. Effect of a rise in income on the demand for an inferior good
Units of good Y
(normal good) a B1 I1 O
Units of good X
(inferior good)

45. Effect of a rise in income on the demand for an inferior goodb
Units of good Y
(normal good) I2 a B1 I1 B2 O
Units of good X
(inferior good)

46. Effect of a rise in income on the demand for an inferior good
Income-consumption curve b
Units of good Y
(normal good) I2 a B1 I1 B2 O
Units of good X
(inferior good)

47. Indifference analysis
Effects of a
change in price

48. Effect of a fall in the price of good X
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good Y
Units of good X

49. Effect of a fall in the price of good X
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good Y j B1
Units of good X

50. Effect of a fall in the price of good X
Assumptions
PX = £1
PY = £1
Budget = £30
Units of good Y j B1
Units of good X

51. Effect of a fall in the price of good X
Assumptions
PX = £1
PY = £1
Budget = £30 k
Units of good Y j B1 I1 B2
Units of good X

52. Effect of a fall in the price of good X
Price-consumption curve I2 k
Units of good Y j B1 I1 B2
Units of good X

53. Deriving a demand curve from a price-consumption curve
Expenditure on
all other goods B1
Units of good X

54. Deriving a demand curve from a price-consumption curveB2 I2
Fall in the
price of X a b
Expenditure on
all other goods I1 B1
Units of good X

55. Deriving a demand curve from a price-consumption curve
Further falls in
the price of X B2 I2 a b
Expenditure on
all other goods I1 B1
Units of good X

56. Deriving a demand curve from a price-consumption curve
Further falls in
the price of X a b
Expenditure on
all other goods c d I4 I3 I2 I1 B1 B2 B3 B4
Units of good X

57. Deriving a demand curve from a price-consumption curveb
Expenditure on
all other goods c d I4 I3 I2 I1 B1 B2 B3 B4
Units of good X

58. Deriving a demand curve from a price-consumption curveb
Price-consumption
curve
Expenditure on
all other goods c d I4 I3 I2 I1 B1 B2 B3 B4
Units of good X a P1
Price of good X Q1
Units of good X

59. Deriving a demand curve from a price-consumption curveb
Price-consumption
curve
Expenditure on
all other goods c d Q3 Q4 I4 I3 I2 I1 B1 B2 B3 B4
Units of good X
Demand a P1
Price of good X P2 b P3 c P4 d Q1 Q2
Units of good X

60. Indifference analysis
Income and substitution effects of a change in price:
(a) normal good

61. Income and substitution effects: normal good
Units of good Y f I1 I2 I3 I4 I5 I6
QX1
Units of Good X

62. Income and substitution effects: normal good
Rise in the price
of good X B2 h
Units of good Y f I1 I2 I3 I4 I5 B1 I6
QX3
QX1
Units of Good X

63. Income and substitution effects: normal good
B1a
Substitution effect
of the price rise g h
Units of good Y f I1 I2 I3 I4 I5 B2 B1 I6
QX3
QX2
QX1
Units of Good X
Substitution
effect

64. Income and substitution effects: normal good
Income effect of
the price rise g h
Units of good Y f I1 I2 I3 I4 I5 B2
B1a B1 I6
QX3
QX2
QX1
Units of Good X
Income
effect
Substitution
effect

65. Indifference analysis
Income and substitution effects of a change in price:
(b) inferior good

66. Income and substitution effects: Inferior (non-Giffen) good
Units of good Y f I1 I2
QX1
Units of Good X

67. Income and substitution effects: Inferior (non-Giffen) good
Rise in the price
of good X B2
Units of good Y f h I1 I2 B1
QX3
QX1
Units of Good X

68. Income and substitution effects: Inferior (non-Giffen) good
B1a
Substitution effect
of the price rise g
Units of good Y f h I1 I2 B2 B1
QX2
QX1
Substitution effect
Units of Good X

69. Income and substitution effects: Inferior (non-Giffen) good
Income effect of
the price rise g
Units of good Y f h I1 I2 B2 B1
B1a
QX2
QX3
QX1
Substitution effect
Units of Good X
Income effect

70. Indifference analysis
Income and substitution effects of a change in price:
(c) Giffen good

71. Income and substitution effects: Giffen good
Units of good Y I1 I2
QX1
Units of Good X

72. Income and substitution effects: Giffen good
Rise in the price
of good X B2 f
Units of good Y I1 h B1 I2
QX1
QX3
Units of Good X

73. Income and substitution effects: Giffen good
B1a
Substitution effect
of the price rise g f
Units of good Y I1 h B2 B1 I2
QX2
QX1
QX3
Substitution effect
Units of Good X

74. Income and substitution effects: Giffen good
Income effect of
the price rise g f
Units of good Y I1 h
B1a B2 B1 I2
QX2
QX1
QX3
Substitution effect
Units of Good X
Income effect

75. Indifference analysis
Characteristics theory

76. Choice between brands: characteristics approach
Quantities of any one of
three brands that can be
purchased for a given
budget at current prices:
Brand 1 is chosen
QA1 x1
Brand 3
Quantity of characteristic A x2 x3 I5 I4 I3 I2 I1
QB1
Quantity of characteristic B

77. Choice between brands: characteristics approach
Effect of reductions in the
price of Brand 2:
Brand 2 is now chosen x1
Brand 3
Quantity of characteristic A
QA5 x5 x4 x2 x3 I5 I4 I3 I2 I1
QB5
Quantity of characteristic B