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Appendix
21 appendix - 1Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Indifference Curve Analysis
21C H A P T E R
APPENDIX
Appendix
21 appendix - 2Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THE BUDGET LINE:What is Attainable
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Appendix
21 appendix - 3Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
THE BUDGET LINE:What is Attainable
Appendix
21 appendix - 4Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
THE BUDGET LINE:What is Attainable
Appendix
21 appendix - 5Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
THE BUDGET LINE:What is Attainable
Appendix
21 appendix - 6Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
THE BUDGET LINE:What is Attainable
Appendix
21 appendix - 7Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
(Attainable)Q
ua
nti
ty o
f A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
(Unattainable)
THE BUDGET LINE:What is Attainable
Appendix
21 appendix - 8Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THE BUDGET LINE:What is Attainable
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
(Attainable)Q
ua
nti
ty o
f A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
(Unattainable)An Increase in income
makes the purchase of
more of either or both
items possible
Appendix
21 appendix - 9Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THE BUDGET LINE:What is Attainable
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
(Attainable)Q
ua
nti
ty o
f A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
(Unattainable)
Price changes causea change in the quantitydemanded of the items
Appendix
21 appendix - 10Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
INDIFFERENCE CURVESWhat is Preferred
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2
j
Appendix
21 appendix - 11Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4
j
k
INDIFFERENCE CURVESWhat is Preferred
Appendix
21 appendix - 12Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6
j
k
l
INDIFFERENCE CURVESWhat is Preferred
Appendix
21 appendix - 13Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
j
k
lm
INDIFFERENCE CURVESWhat is Preferred
Appendix
21 appendix - 14Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
j
k
lm
I
INDIFFERENCE CURVESWhat is Preferred
Appendix
21 appendix - 15Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
I2
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
j
k
lm
The sloperepresents
the marginalrate of substi-tution, (MRS)
I1
INDIFFERENCE CURVESWhat is Preferred
Appendix
21 appendix - 16Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
I1
If the consumer
had greater income,
more of either or
both products could
be purchased
INDIFFERENCE CURVESWhat is Preferred
Appendix
21 appendix - 17Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
I1
A higher
combination
of choices will
be preferred
I2
I3
I4
INDIFFERENCE CURVESWhat is Preferred
Appendix
21 appendix - 18Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
I1
I2
I3
I4
A family of all
such expressions of
indifference can be
developed for every
level of income
AnIndifference
Map
INDIFFERENCE CURVESWhat is Preferred
Appendix
21 appendix - 19Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
EQUILIBRIUM AT TANGENCY
I1
I2
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
I3
I4
(Attainable)
(Unattainable)
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
Appendix
21 appendix - 20Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
(Attainable)
(Unattainable)
Equilibriumoccurs whenthe consumer
selects thecombination
which reachesthe highestattainable
indifferencecurve. I1
I2
I3
I4
EQUILIBRIUM AT TANGENCY
Appendix
21 appendix - 21Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
What happens if the price of Bincreases to $1.50?
PriceB QuantityB
$1.00 6
I3
The budget linerotates reflectingthe reduction inthe quantity of B
units which isattainable.
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
EQUILIBRIUM AT TANGENCY
Appendix
21 appendix - 22Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
What happens if the price of Bincreases to $1.50?
PriceB QuantityB
$1.00 1.50
63
By recording thevarious quantitiesdemanded at thevarious prices yieldsthe Demand schedule
I2
I3
The budget linerotates reflectingthe reduction inthe quantity of B
units which isattainable.
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
EQUILIBRIUM AT TANGENCY
Appendix
21 appendix - 23Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
What happens if the price of Bincreases to $1.50?
PriceB QuantityB
$1.00 1.50
63
By recording thevarious quantitiesdemanded at thevarious prices yieldsthe demand schedule.
DERIVING THE DEMAND CURVE
Price of B
Quantity of B
$1.50
1.00
0
2 4 6 8 10 12
DB
Plotting the Points yields the Demand Curve for Product B
Key Termsbudget lineindifference curvemarginal rate of substitution (MRS)indifference mapequilibrium position
ENDBACKCopyright McGraw-Hill/Irwin, Inc. 2005
Appendix
21 appendix - 25Copyright McGraw-Hill/Irwin, 2005
The Budget Line: What is Attainable
Indifference Curves: What is Preferred
Equilibrium at Tangency
Deriving the Demand Curve
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Next…
The Costs of Production
Chapter 22