1. INDIFFERENCE ANALYSIS
Indifference curves
constructing an indifference curve
the shape of an indifference curve
diminishing marginal rate of substitution
an indifference map
The budget line
constructing a budget line
effect of a change in income
effect of a change in price 6

2. Constructing an indifference curve
Pears
Oranges
Point 30 24 20 14 10 8 6 6 7 8 10 13 15 20 a b c d e f g
Pears
Oranges

3. Deriving the marginal rate of substitution (MRS)26 b
Units of good Y 6 7
Units of good X

4. Deriving the marginal rate of substitution (MRS)
DY = 4 26 b
DX = 1
Units of good Y 6 7
Units of good X

5. Deriving the marginal rate of substitution (MRS)
DY = 4 26 b
DX = 1
Units of good Y
MRS = 1 c
DY = 1 d 9
DX = 1 6 7 13 14
Units of good X

6. An indifference map
Units of good Y I5 I4 I3 I2 I1
Units of good X

7. A budget line a b Units of good Y Units of good X Units of good X 5 105 10 15
Units of
good Y 30 20 10
Point on
budget line a b b
Units of good Y
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good X

8. Effect of an increase in income on the budget line
Assumptions
PX = £2
PY = £1
Budget = £40
Units of good Y n m 16
Budget
= £40
Budget
= £30 7
Units of good X

9. Effect on the budget line of a fall in the price of good X
Assumptions
PX = £1
PY = £1
Budget = £30
Units of good Y B2 B1 b c
Units of good X

10. INDIFFERENCE ANALYSIS
The optimum consumption point
equating the marginal rate of substitution with the price ratio
The effect of a change in income
the income–consumption curve
the Engel curve
income elasticity of demand and the income–consumption curve
the effect of a rise in income on the demand for an inferior good 7

11. Finding the optimum consumption
Units of good Y
Budget line I5 I4 I3 I2 I1 O
Units of good X

12. Same slope at t of indifference curve and budget line
Units of good Y t Y1 u I5 I4 v I3 I2 I1 O X1
Units of good X

13. Effect on consumption of a change in income
Units of good Y B1 I1 O
Units of good X

14. Effect on consumption of a change in income
Units of good Y I2 B1 B2 I1 O
Units of good X

15. Effect on consumption of a change in income
Units of good Y I4 I3 I2 B1 B2 B3 B4 I1 O
Units of good X

16. Effect on consumption of a change in income
Income–consumption curve
Units of good Y I4 I3 I2 B1 B2 B3 B4 I1 O
Units of good X

17. Deriving an Engel curve from an income–consumption curve
Bread
Income-consumption
curve
Qb3 c
Qb2 b
Qb1 a I3 I2 I1 B1 B2 B3
Qcd1
Qcd2
Qcd3
CDs Y3 c
Income (£) Y2 b Y1 a
Qcd1
Qcd2
Qcd3
CDs

18. Deriving an Engel curve from an income–consumption curve
Bread
Income-consumption
curve
Qb3 c
Qb2 b
Qb1 a I3 I2 I1 B1 B2 B3
Qcd1
Qcd2
Qcd3
CDs
Engel curve Y3 c
Income (£) Y2 b Y1 a
Qcd1
Qcd2
Qcd3
CDs

19. Effect of a rise in income on the demand for an inferior good
Units of good Y
(normal good) a B1 I1 O
Units of good X
(inferior good)

20. Effect of a rise in income on the demand for an inferior goodb
Units of good Y
(normal good) I2 a B1 I1 B2 O
Units of good X
(inferior good)

21. Effect of a rise in income on the demand for an inferior good
Income–consumption curve b
Units of good Y
(normal good) I2 a B1 I1 B2 O
Units of good X
(inferior good)

22. Effect of a fall in the price of good X
Assumptions
PX = £2
PY = £1
Budget = £30
Units of good Y j B1 I1
Units of good X

23. Effect of a fall in the price of good X
Assumptions
PX = £1
PY = £1
Budget = £30 k
Units of good Y j I2 B1 I1 B2
Units of good X

24. Effect of a fall in the price of good X
Price–consumption curve k
Units of good Y j I2 B1 I1 B2
Units of good X

25. Deriving a demand curve from a price–consumption curve
Further falls in
the price of X a b
Expenditure on
all other goods c d I4 I3 I2 I1 B1 B2 B3 B4
Units of good X

26. Deriving a demand curve from a price–consumption curveb
Price-consumption
curve
Expenditure on
all other goods c d I4 I3 I2 I1 B1 B2 B3 B4
Units of good X

27. Deriving a demand curve from a price–consumption curveb
Price-consumption
curve
Expenditure on
all other goods c d I4 I3 I2 I1 B1 B2 B3 B4
Units of good X a P1
Price of good X P2 b Q1 Q2
Units of good X

28. Deriving a demand curve from a price–consumption curveb
Price-consumption
curve
Expenditure on
all other goods c d I4 I3 I2 I1 B1 B2 B3 B4
Units of good X a P1
Price of good X P2 b P3 c P4 d Q1 Q2 Q3 Q4
Units of good X

29. Deriving a demand curve from a price–consumption curveb
Price-consumption
curve
Expenditure on
all other goods c d I4 I3 I2 I1 B1 B2 B3 B4
Units of good X a P1
Price of good X P2 b P3 c P4 d
Demand Q1 Q2 Q3 Q4
Units of good X

30. INDIFFERENCE ANALYSIS
The effect of changes in price
the price–consumption curve
deriving the individual's demand curve
Income and substitution effects of a price change
a normal good
an inferior good
a Giffen good (a special type of inferior good) 8

31. Income and substitution effects: normal good
Units of good Y f I1 I2 I3 I4 I5 B1 I6
QX1
Units of Good X
Units of Good X

32. Income and substitution effects: normal good
Rise in the price
of good X h
Units of good Y f I1 I2 I3 I4 I5 B2 B1 I6
QX3
QX1
Units of Good X
Units of Good X

33. Income and substitution effects: normal good
of the price rise g h
Units of good Y f I1 I2 I3 I4 I5 B2
B1a B1 I6
QX2
QX1
Substitution
effect
Units of Good X
Units of Good X

34. Income and substitution effects: normal good
Income effect
of the price rise g h
Units of good Y f I1 I2 I3 I4 I5 B2
B1a B1 I6
QX3
QX2
QX1
Income
effect
Substitution
effect
Units of Good X
Units of Good X

35. Income and substitution effects: Inferior (non-Giffen) good
Units of Good Y
Units of good Y f I1 I2 B1
QX1
Units of Good X
Units of Good X

36. Income and substitution effects: Inferior (non-Giffen) good
Units of Good Y
Rise in the price
of good X
Units of good Y f h I1 I2 B2 B1
QX3
QX1
Units of Good X
Units of Good X

37. Income and substitution effects: Inferior (non-Giffen) good
Units of Good Y
Substitution effect
of the price rise g
Units of good Y f h I1 I2 B2
B1a B1
QX2
QX1
Substitution effect
Units of Good X
Units of Good X

38. Income and substitution effects: Inferior (non-Giffen) good
Units of Good Y
Income effect of
the price rise g
Units of good Y f h I1 I2 B2
B1a B1
QX2
QX3
QX1
Substitution effect
Units of Good X
Units of Good X
Income effect

39. Income and substitution effects: Giffen good
Units of Good Y f
Units of good Y I1 I2 B1
QX1
Units of Good X
Units of Good X

40. Income and substitution effects: Giffen good
Units of Good Y
Rise in the price
of good X f
Units of good Y I1 h B2 I2 B1
QX1
QX3
Units of Good X
Units of Good X

41. Income and substitution effects: Giffen good
Units of Good Y
Substitution effect
of the price rise g f
Units of good Y I1 h
B1a B2 I2 B1
QX2
QX1
QX3
Substitution effect
Units of Good X
Units of Good X

42. Income and substitution effects: Giffen good
Units of Good Y
Income effect of
the price rise g f
Units of good Y I1 h
B1a B2 I2 B1
QX2
QX1
QX3
Substitution effect
Units of Good X
Units of Good X
Income effect

43. INDIFFERENCE ANALYSIS
The effect of a change in price on the demand for other goods
The usefulness of indifference analysis
superiority of using ordinal measures
limitations of indifference analysis 9