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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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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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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IndifferenceIndifference
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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IndifferenceIndifference
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.