1. Indifference Curve Analysis21
C H A P T E R
APPENDIX
Indifference Curve Analysis

2. THE BUDGET LINE: What is Attainable 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures
Quantity of A
Quantity of B 12 10 8 6 4 2
$12

3. THE BUDGET LINE: What is Attainable 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
Quantity of A
Quantity of B

4. THE BUDGET LINE: What is Attainable 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
Quantity of A
Quantity of B

5. THE BUDGET LINE: What is Attainable 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
Quantity of A
Quantity of B

6. THE BUDGET LINE: What is Attainable 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
Quantity of A
Quantity of B

7. THE BUDGET LINE: What is Attainable 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
(Unattainable)
Quantity of A
(Attainable)
Quantity of B

8. THE BUDGET LINE: What is Attainable An Increase in income
makes the purchase of
more of either or both
items possible
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
(Unattainable)
Quantity of A
(Attainable)
Quantity of B

9. a change in the quantity
THE BUDGET LINE:
What is Attainable
Price changes cause
a change in the quantity
demanded of the items
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
(Unattainable)
Quantity of A
(Attainable)
Quantity of B

10. INDIFFERENCE CURVES What is Preferred j 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures j 12 10 8 6 4 2
$12
Quantity of A
An Indifference
Schedule
Combi-
nation
Units
of A
of B j
Quantity of B

11. INDIFFERENCE CURVES What is Preferred j 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures j 12 10 8 6 4 2
$12 k
Quantity of A
An Indifference
Schedule
Combi-
nation
Units
of A
Units
of B j k
Quantity of B

12. INDIFFERENCE CURVES What is Preferred j 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures j 12 10 8 6 4 2
$12 k
Quantity of A l
An Indifference
Schedule
Combi-
nation
Units
of A
Units
of B j k l
Quantity of B

13. INDIFFERENCE CURVES What is Preferred j 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures j 12 10 8 6 4 2
$12 k
Quantity of A l
An Indifference
Schedule m
Combi-
nation
Units
of A
Units
of B j k l m
Quantity of B

14. INDIFFERENCE CURVES What is Preferred j 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures j 12 10 8 6 4 2
$12 k
Quantity of A l
An Indifference
Schedule m
Combi-
nation
Units
of A
Units
of B I j k l m
Quantity of B

15. INDIFFERENCE CURVES What is Preferred j 8 0 $12 6 3 12 4 6 12 2 9 12
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures j 12 10 8 6 4 2
The slope
represents
the marginal
rate of substi-
tution, (MRS)
$12 k
Quantity of A l
An Indifference
Schedule m
Combi-
nation
Units
of A
Units
of B I2 I1 j k l m
Quantity of B

16. INDIFFERENCE CURVES What is Preferred If the consumer
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
If the consumer
had greater income,
more of either or
both products could
be purchased
Quantity of A
An Indifference
Schedule
Combi-
nation
Units
of A
Units
of B I1 j k l m
Quantity of B

17. INDIFFERENCE CURVES What is Preferred A higher combination
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
A higher
combination
of choices will
be preferred
Quantity of A
An Indifference
Schedule I4 I3
Combi-
nation
Units
of A
Units
of B I2 I1 j k l m
Quantity of B

18. INDIFFERENCE CURVES What is Preferred An Indifference Map
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12 An
Indifference
Map
A family of all
such expressions of
indifference can be
developed for every
level of income
Quantity of A
An Indifference
Schedule I4 I3
Combi-
nation
Units
of A
Units
of B I2 I1 j k l m
Quantity of B

19. EQUILIBRIUM AT TANGENCY
Units of
A Price
$1.50
B Price
$1.00
Total
Expenditures 12 10 8 6 4 2
$12
(Unattainable)
Quantity of A
An Indifference
Schedule I4 I3
Combi-
nation
Units
of A
Units
of B
(Attainable) I2 I1 j k l m
Quantity of B

20. EQUILIBRIUM AT TANGENCY
occurs when
the consumer
selects the
combination
which reaches
the highest
attainable
indifference
curve. 12 10 8 6 4 2
(Unattainable)
Quantity of A I4 I3
(Attainable) I2 I1
Quantity of B

21. EQUILIBRIUM AT TANGENCY
What happens if the price of B
increases to $1.50?
The budget line
rotates reflecting
the reduction in
the quantity of B
units which is
attainable. 12 10 8 6 4 2
PriceB
QuantityB
$1.00 6
Quantity of A I3
Quantity of B

22. EQUILIBRIUM AT TANGENCY
What happens if the price of B
increases to $1.50?
The budget line
rotates reflecting
the reduction in
the quantity of B
units which is
attainable. 12 10 8 6 4 2
PriceB
QuantityB
$1.00
1.50 6 3
Quantity of A I3
By recording the
various quantities
demanded at the
various prices yields
the Demand schedule I2
Quantity of B

23. DERIVING THE DEMAND CURVE
What happens if the price of B
increases to $1.50?
Plotting the
Points yields the
Demand Curve
for Product B
Price of B
$1.50
1.00
PriceB
QuantityB
$1.00
1.50 6 3
By recording the
various quantities
demanded at the
various prices yields
the demand schedule. DB
Quantity of B

24. Key Terms budget line indifference curve
marginal rate of substitution (MRS)
indifference map
equilibrium position
Copyright McGraw-Hill/Irwin, Inc
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25. Next…
The Costs of Production
Chapter 22