Indifference map & budget line Y Yi r Infeasible region s I5 t Y1 I4 I3 u Animate A) B line and Indifference Map, I2 v I1 feasible region Y O X1 Xi Optimal point : Where the budget line is tangent to the highest indifference curve.

Introductory Economic Lecture 5

Introductory Economic Lecture 12

Limitations of Indifference analysis

If the budget line is tangential to the indifference curve both will have the same slope Slope of the budget line = Px Py MUx Slope of the indifference curve = MRS = MUy Must animate 1) slope of BL/////////////////////2) slope of IC must wait at MRS ( must animate ) /////////3)Therefore……………….///////////////4) LAST i.e. Therefore the optimal consumption point : Px MUx = Py MUy MUx MUy i.e. = Px Py

MINIMIZATION OF COST AT A CERTAIN LEVEL OF UTILITY Y r I B1 B2 B3 B4 B5 X O

The effect on optimal consumption of a change in real income Y Income consumption curve u t A) Animate grey line (thick one) and income consumption curve. s I4 r I3 I2 I1 B1 B2 B3 B4 X O

I3 I2 I1 O Qcd1 Qcd2 Qcd3 Y1 O Qcd1 Qcd2 Qcd3 Bread Income consumption curve c Qb3 b Qb2 a I3 Qb1 I2 I1 B1 B2 B3 O Qcd1 Qcd2 Qcd3 CDs Income Animate lower graph Engel curve Y3 c Y2 b Y1 a O Qcd1 Qcd2 Qcd3 CDs

I3` I2` I1` Qcd3 Qcd2 Qcd1 O Q3` Q2` Q1` Y1 O Q3` Q2` Q1` CDs B3 c` B2 I3` Qcd2 b` I2` B1 Qcd1 a` I1` O Margarine Q3` Q2` Q1` Income Animate lower figure c` Y3 b` Y2 Y1 a` Demand Curve O Q3` Q2` Q1` Margarine

The effect on optimal consumption of a change in price of one good Y a 30 20 Price consumption curve k j I2 ANIMATE\\\\\\\\1) Only B1 2)I1 and I2 and J\\\\\\\\\\\\\\\\\\\\\\\\\\\ 3) B2 a and k\\\\\\\\\\\\\\\4) Price consumption curve +grey line 10 I1 B1 B2 X O 30 10 15 20

Derivation of demand curve for good X Px j Rs 20 k Rs 10 X O 15 30

Price effect for normal good Y g h f I2 2)Animate dotted red line point g and B1a//////////////////////////////////3)substitution effect +income effect I1 B2 B1a B1 X O Substitution effect Income effect

Price effect for inferior good Y g f h I2 Animate lower arrows I.E and S.E I1 B2 B1a B1 X O Substitution effect Income effect

Price effect for giffen good Y g f I1 Animate lower 2 arrows S.E and I.E h I2 B2 B1a B1 X O Substitution effect Income effect

An individual consumer’s demand for dishwasher P Do not convert into flash P1 D O Q 1 2