Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Indifference Curve Analysis • Key Concepts • Summary ©2005 South-Western College Publishing 1 What does this appendix cover? A method for determining equal levels of satisfaction or total utility for different bundles of goods without an exact measure of utils 2 What is an indifference curve? A curve showing the different combinations of two goods that provide the same satisfaction or total utility to a consumer 3 A Consumer’s Indifference Curve Quantity of steak 20 An Indifference Curve for a Consumer A Choice B 15 C 10 A B C D Steak 20 15 10 5 Lobster 4 6 10 12 7 D 5 Indifference Curve 4 8 12 Quantity of lobster 16 4 What marginal rate of substitution? The rate at which a consumer is willing to substitute one good for another good without a change in total utility 5 What does the MRS equal? The MRS equals the slope of an indifference curve at any point on the curve 6 What conclusion can we make of indifference curves? The slope of the indifference curve is negative and equal to the marginal rate of substitution (MRS), which declines as one moves downward along the curve 7 What is an indifference map? A selection of indifference curves with each curve representing a different level of satisfaction or total utility 8 What conclusion can we make of indifference maps? Each consumer has a set of indifference curves that form a map 9 Quantity of Steak A Consumer’s Indifference Map 8 6 4 I I1 4 I3 2 I2 I1 1 2 3 4 Quantity of Lobster Q 10 What is a budget line? A line that represents all combinations of two goods that a consumer can purchase with a fixed amount of money given the price of each good 11 Quantity of Steak A Consumer’s Budget Line 8 6 4 Budget Line 2 1 2 3 4 Quantity of Lobster Q 12 What does the slope of the budget line equal? The slope of the budget line equals the ratio of the price of good X on the horizontal axis divided by the price of good Y on the vertical axis 13 Slope of budget line 14 Quantity of Steak A Consumer’s Indifference Map 8 6 4 I I1 4 2 I2 I3 I1 1 2 3 4 Quantity of Lobster Q 15 Quantity of Steak Deriving a Demand Curve 8 6 Y X 4 I3 2 I1 1 2 3 4 Q 16 Deriving a Demand Curve $16 X’ $12 Y’ $8 D $4 1 2 3 4 Quantity of Lobster 17 What conclusion can we draw? Consumer equilibrium occurs where the budget line is tangent to the highest attainable indifference curve. At this unique point, MRS = slope (price ratio of Px/Py) 18 Key Concepts 19 • • • • • • • What is an indifference curve? What is the marginal rate of substitution? What does the MRS equal? What is an indifference map? What is a budget line? What does the slope of the budget line equal? What conclusion can we draw? 20 Summary 21 An indifference curve is a curve showing the different combinations of two goods that provide the same satisfaction or total utility to a consumer 22 Our analysis concludes that the slope of the indifference curve is negative and equal to the marginal rate of substitution (MRS), which declines as one moves downward along the curve 23 Consumer equilibrium occurs where the budget line is tangent to the highest attainable indifference curve. At this unique point, MRS = slope (price ratio of Px/Py) 24 END 25