The Indifference Curve Approach
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Transcript of The Indifference Curve Approach
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• Change in Budget LineChange in Budget Line
• Consumer’s Equilibrium
• Price Effect
• Giffen Good Paradox
• Applications of the Indifference Curve Approach
What will be Covered?What will be Covered?
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A Change in the A Change in the Money Money IncomeIncome.
Y
X0
Tell Me the Change When...
I
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A Change in the A Change in the Relative Relative PricePrice.
Y
X0
Tell Me the Change When...
PxPx
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Y
X0
E
D
C
Which Point Is the Equilibrium?
E
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Y
X0
E
The The Tangency PointTangency Point Between the Budget Between the Budget Line and the Line and the Indifference Curve of Indifference Curve of the Highest the Highest Attainable Utility Attainable Utility LevelLevel
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Y
X0
A Different Level of Utility A Different Level of Utility
Consumes on a New Consumes on a New Budget LineBudget Line
S.E. + I.E.S.E. + I.E.Px Decreases
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Y
X0
A Change in Consumption A Change in Consumption After a Change in Relative After a Change in Relative Price of Two GoodsPrice of Two Goods
Consumes on a Consumes on a Hypothetical Budget LineHypothetical Budget Line
No Change in the Utility No Change in the Utility LevelLevel
Px Decreases
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Y
X0
An Inferior GoodAn Inferior Good
Consumes on a New Consumes on a New Budget LineBudget Line
Consumes Less XConsumes Less X
An Increase in the Utility An Increase in the Utility LevelLevel
Px DecreasesPx Decreases
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Y
X0
A Normal/ Superior GoodA Normal/ Superior Good
Consumes on a New Consumes on a New Budget LineBudget Line
Consumes More XConsumes More X
An Increase in the Utility An Increase in the Utility LevelLevel
Px DecreasesPx Decreases
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Still Remember the Law of Demand?
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Px/Py Of An
Inferior Inferior GoodGood
Will Consume More X
So What?
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Px/Py
X0
We Will We Will Have An Have An Upward- Upward- SlopingSloping Demand Demand CurveCurve
There Is A Theoretical Or Logical Possibility to Refuse The Law
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The Law
of
Demand
Therefore the Law of Demand Is Therefore the Law of Demand Is AssertedAsserted
The Law Has Not Been RejectedThe Law Has Not Been Rejected
Theory by Its Hypothetical Nature Theory by Its Hypothetical Nature Cannot Reject Another TheoryCannot Reject Another Theory
Only Empirical Facts Can Reject a Only Empirical Facts Can Reject a TheoryTheory
As There Is No Observations of Giffen As There Is No Observations of Giffen Good Cases, The Law Is ConfirmedGood Cases, The Law Is Confirmed
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Left Shoes
Right Shoes
Are They SUBSTITUTES Or COMPLEEMNTS?
Which IC Can Correctly Show Their Relationship?
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Left Shoes
Right Shoes
What Is the Result of a S.E.?
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Tea
Coffee
Are They SUBSTITUTES Or COMPLEEMNTS?
Which IC Can Correctly Show Their Relationship?
TeaTea
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Tea
Coffee
What Happens If The MRSc < MRSe?
We only consume Tea!
TeaTea
Budget LineBudget Line
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Y
X0
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Money Income
0 Food
Lump Sum Payment
How Much Would You Consume In a Regular
Restaurant?
How Much Would You Consume In a Buffet
Dinner ?
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Money Income
0 Children
Children Are Less Preferred Today!
Money Income Has Been Money Income Has Been IncreasingIncreasing
You Have Less Children!
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