INDIFFERENCE CURVES

INDIFFERENCE SCHEDULE

Combination x YA 1 22

B 2 14

C 3 10

D 4 8

E 5 7

1210 8 6 4 2 0

1 2 3 4 5

A(1, 22)

B(2,14)

C(3, 10)

24 22 20 18 16 14

D(4, 8)

E(5, 7)

IC1

X

Y

Y X

Y

X

PROPERTIES OF IC

5. Indifference curve touches neither X-axis nor Y-axis.

6. Indifference curve need not to be parallel to each other .

1210 8 6 4 2 0

1 2 3 4 5

XY IC1

A(0, 10)X

BUDGET CONSTRAINTS

• Budget Constraints limits an individual’s ability to consume in light of the prices they must pay for various goods and services.

• Budget Line or Price Line: Show all possible combination of two goods that the consumer can buy if he spends the whole of his given sum of money at his purchases at the given prices.

BUDGET LINE

Combination

Apples(@ Rs. 6 per unit)

Oranges @ Rs. 2 Per unit

Total budget(Rs.)=6xA+2xO

A 0 12 24

B 1 9 24

C 2 6 24

D 3 3 24

E 4 0 24 Budget line corresponding to budget of Rs. 24

Unattainable

Attainab

le

Y

X

CONDITIONS OF CONSUMER EQUILIBRIUMY

X

12

10

8

6

4

2

01 2 3 4 5 6

(Attainable)

(Unattainable)

IC1

IC2

IC3

IC4

C

A

B

Condition-1: Budget Line should be Tangent to the

Indifference Curve.

CONDITIONS OF CONSUMER EQUILIBRIUM

Condition-2: Indifference Curve must be convex to the origin.

1210 8 6 4 2 0

1 2 3 4 5

16 14

X

Y

IC1 E

Budget Line

Combination E can not be equilibrium point Because MRS will be increasing at E whereas it should be diminishing at the equilibrium point. A

B

SHIFT IN THE BUDGET LINE

If budget (Income) of the consumer reduces to , then budget line will shift inward to L3

If budget (Income) of the consumer increases to , then budget line will shift outward to L2

1210 8 6 4 2 0

1 2 3 4 5 6

181614

X

Y

L2

L3

L1

p

Thank You