Econ Chapter 21 Appendix Presentation

8/8/2019 Econ Chapter 21 Appendix Presentation

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Indifference AnalysisIndifference Analysis

Economics, Sixth EditionEconomics, Sixth Edition

Boyes/MelvinBoyes/Melvin

Appendix to Chapter 21Appendix to Chapter 21


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2Copyright Houghton Mifflin Company. All rights reserved.

Indifference CurvesIndifference Curves Indifference analysis is an alternative way

of explaining consumer choice that does

not require an explicit discussion of utility. Indifferent: the consumer has no

preference among the choices.

Indifference curve: a curve showing all the

combinations of two goods (or classes of

goods) that the consumer is indifferent

among.


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Copyright Houghton Mifflin Company. All rights reserved.

Indifference Curves: ShapeIndifference Curves: Shape A common shape for an indifference

curve is downward sloping.

For the consumer to be indifferent to

the bundle of goods chosen, as less of

one good is consumed, more of another

must be consumed.


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Indifference CurveIndifference Curve


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Indifference Curves: Shape (2)Indifference Curves: Shape (2) The indifference curves are not likely to be

vertical, horizontal, or upward sloping.

Avertical or horizontal indifference curve holds thequantity of one of the goods constant, implying that the

consumer is indifferent to getting more of one good

without giving up any of the other good.

An upward-sloping curve would mean that the

consumer is indifferent between a combination of goods

that provides less of everything and another thatprovides more of everything.

Rational consumers usually prefer more to less.


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Indifference Curve ShapesIndifference Curve Shapes


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Indifference Curves: SlopeIndifference Curves: Slope The slope or steepness of indifference

curves is determined by consumer

preferences. It reflects the amount of one good that a consumer

must give up to get an additional unit of the other good

while remaining equally satisfied.

This relationship changes according to diminishing

marginal utilitythe more a consumer has of a good,the less the consumer values an additional value of

that good. This is shown by an indifference curve that

bows in toward the origin.


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BowedBowed--inin

IndifferenceIndifference

CurveCurve


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Indifference Curves:Indifference Curves:

No Crossing Allowed!No Crossing Allowed! Indifference curves cannot cross.

If the curves crossed, it would mean that the

same bundle of goods would offer two differentlevels of satisfaction at the same time.

If we allow that the consumer is indifferent to all

points on both curves, then the consumer must

not prefer more to less.

There is no way to sort this out. The consumer

could not do this and remain a rational consumer.


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Curves CannotCurves Cannot

Cross!Cross!


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Indifference MapIndifference Map An indifference map is a complete set of

indifference curves.

It indicates the consumers preferencesamong all combinations of goods and

services.

The farther from the origin the indifference

curve is, the more the combinations of

goods along that curve are preferred.


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MapMap


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Budget ConstraintBudget Constraint The indifference map only reveals the

ordering of consumer preferences among

bundles of goods. It tells us what theconsumer is willing to buy.

It does not tell us what the consumer isable to buy. It does not tell us anythingabout the consumers buying power.

The budget line shows all thecombinations of goods that can bepurchased with a given level of income.


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TheTheBudget LineBudget Line


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Consumer EquilibriumConsumer Equilibrium The indifference map in combination with the

budget line allows us to determine the onecombination of goods and services that theconsumer most wants and is able topurchase. This is the consumer equilibrium.

The demand curve for a good can be derivedfrom indifference curves and budget lines by

changing the price of one of the goods(leaving everything else the same) andfinding the equilibrium points.


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ConsumerConsumer

EquilibriumEquilibrium

The consumer maxi-mizes satisfaction by

purchasing the

combination of

goods that is on the

indifference curve

farthest from theorigin but attainable

given the

consumers budget.


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Deriving theDeriving the

Demand CurveDemand Curve

By changing the price of

one of the goods and

leaving everything else

the same, we can derive

the demand curve.

In (a), the price of a gallon

of gasoline doubles,

rotating the budget line

from Y1 to Y2.Theconsumer equilibrium

moves from point C to E,

and the quantity

demanded of gasoline

falls from 3 to 2.

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Econ Chapter 21 Appendix Presentation

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