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Appendix 21 appendix - 1 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position.

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Presentation on theme: "Appendix 21 appendix - 1 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position."— Presentation transcript:

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2 Appendix 21 appendix - 1 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show Indifference Curve Analysis 21 C H A P T E R APPENDIX

3 Appendix 21 appendix - 2 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S BUDGET LINE Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12

4 Appendix 21 appendix - 3 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S BUDGET LINE Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 (Unattainable) Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12

5 Appendix 21 appendix - 4 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S BUDGET LINE Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 (Unattainable) Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12

6 Appendix 21 appendix - 5 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S BUDGET LINE Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 (Unattainable) Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12

7 Appendix 21 appendix - 6 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S BUDGET LINE Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 (Unattainable) Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12

8 Appendix 21 appendix - 7 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S BUDGET LINE Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 (Attainable) Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 (Unattainable)

9 Appendix 21 appendix - 8 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S BUDGET LINE Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 (Attainable) Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 (Unattainable) An Increase in income makes the purchase of more of either or both items possible

10 Appendix 21 appendix - 9 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S BUDGET LINE Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 (Attainable) Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 (Unattainable) Price changes cause a change in the quantity demanded of the items

11 Appendix 21 appendix - 10 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 j

12 Appendix 21 appendix - 11 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 j k

13 Appendix 21 appendix - 12 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 l 4 6 j k l

14 Appendix 21 appendix - 13 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 l 4 6 m 3 8 j k l m

15 Appendix 21 appendix - 14 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 l 4 6 m 3 8 j k l m I

16 Appendix 21 appendix - 15 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show I2I2 A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 l 4 6 m 3 8 j k l m The slope represents the marginal rate of substi- tution, (MRS) I1I1

17 Appendix 21 appendix - 16 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 l 4 6 m 3 8 I1I1 If the consumer had greater income, more of either or both products could be purchased

18 Appendix 21 appendix - 17 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 l 4 6 m 3 8 I1I1 A higher combination of choices will be preferred I2I2 I3I3 I4I4

19 Appendix 21 appendix - 18 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S PRODUCT INDIFFERENCE Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 l 4 6 m 3 8 I1I1 I2I2 I3I3 I4I4 A family of all such expressions of indifference can be developed for every level of income An Indifference Map

20 Appendix 21 appendix - 19 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S EQUILIBRIUM POSITION I1I1 I2I2 Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 I3I3 I4I4 (Attainable) (Unattainable) Units of A Price $1.50 Units of B Price $1.00 Total Expenditures 8 0 $12 6 3 12 4 6 12 2 9 12 0 12 12 An Indifference Schedule Combi- nation Units of A Units of B j 12 2 k 6 4 l 4 6 m 3 8

21 Appendix 21 appendix - 20 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show A CONSUMER’S EQUILIBRIUM POSITION Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12 (Attainable) (Unattainable) Equilibrium occurs when the consumer selects the combination which reaches the highest attainable indifference curve I1I1 I2I2 I3I3 I4I4

22 Appendix 21 appendix - 21 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show What happens if the price of B increases to $1.50 Price B Quantity B $1.006 A CONSUMER’S EQUILIBRIUM POSITION I3I3 The budget line rotates reflecting the reduction in the quantity of B units which is attainable Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12

23 Appendix 21 appendix - 22 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show What happens if the price of B increases to $1.50 Price B Quantity B $1.00 1.50 6363 By recording the various quantities demanded at the various prices yields the Demand schedule A CONSUMER’S EQUILIBRIUM POSITION I2I2 I3I3 The budget line rotates reflecting the reduction in the quantity of B units which is attainable Quantity of A Quantity of B 12 10 8 6 4 2 0 2 4 6 8 10 12

24 Appendix 21 appendix - 23 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show What happens if the price of B increases to $1.50 Price B Quantity B $1.00 1.50 6363 By recording the various quantities demanded at the various prices yields the Demand schedule A CONSUMER’S EQUILIBRIUM POSITION Price of B Quantity of B $1.50 1.00 0 2 4 6 8 10 12 DBDB Plotting the Points yields the Demand Curve for Product B

25 Key Terms budget line indifference curve marginal rate of substitution (MRS) indifference map equilibrium position ENDBACK Copyright McGraw-Hill/Irwin 2002

26 Appendix 21 appendix - 25 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show Conclusions

27 Appendix 21 appendix - 26 Copyright McGraw-Hill/Irwin, 2002 A Consumer’s Budget Line A Consumer’s Product Indifference A Consumer’s Equilibrium Position Key Terms Previous Slide Next Slide End Show Next… The Costs of Production Chapter 22

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