guide to drawing the graphs (1)

7/17/2019 Guide to Drawing the Graphs (1)

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GUIDE TO DRAWING THE

GRAPHSEcon 11 Spring 2015Carlos Cantú García



Own Price Effect: X Normal, Px

Tip 1: If the intersection between the initial BC and the CE is in the middle of the graph you’llhave more space to maneuver the changes.

SE

CE

X

Px

X

TEX

Y

X

1- Determine the direction of each effect (SE, IE, TE) and draw

the initial budget constraint (BC), final BC and compensatedexpenditure (CE).

IEInitial BC

Final BC




Tip II: The SE goes always in the same direction of the change in price.

Tip III: Do not draw the initial IC, just picture it in your head. It might be the case you want toadjust the location of B given your final bundle.

SE

Xc

Px

X

TEX

Y

X

2- Determine the location of the initial bundle (A). Picture the

indifference curve (IC) that is tangent to the initial bundle and the CE. The point tangent to the CE is your secondcompensated bundle (B).

IE

X1

X

SE

B

AX is relatively cheaper




Tip IV: If the question only asks about own-price effects don’t worry about what happens to Yin the final bundle.

Px

X

TEX

Y

X

3- Determine the location of the final bundle (C). Take into

consideration the direction of the IE and the direction of theTE.

IE

X1

X

SE

C

A

B

X2

IE

Xc

SE

Greater purchasingpower and X is normal.




Px

X

TEX

Y

X

4- Draw the initial and final ICs. Make sure that they do not

cross.

IE

X1

X

SE

C

A

X2

IE

Xc

SE

B

TE

The total effect is theone we can observe.



Own Price Effect: X Inferior, Px

When X is inferior the TE depends on the magnitude of each effect.

Y

XX1

C

A

B

X2

IE

Xc

TE

SE

Y

XX1

C

A

B

X2

IE

Xc

TE SE

|SE|>|IE||SE|<|IE|



Cross Price Effect: Y Inferior, Px

Tip 1: If the intersection between the initial BC and the CE is in the middle of the graph you’llhave more space to maneuver the changes.

SE

CE

Y

Px

Y

TEY

Y

X

1- Determine the direction of each effect (SE, IE, TE) and draw

the initial budget constraint (BC), final BC and compensatedexpenditure (CE).

IEInitial BC

Final BC



Tip II: The cross-price SE goes always in the opposite direction of the change in price.

Tip III: Do not draw the initial IC, just picture it in your head. It might be the case you want toadjust the location of B given your final bundle.

SE

Yc

Px

Y

TEY

Y

X

2- Determine the location of the initial bundle (A). Picture the

indifference curve (IC) that is tangent to the initial bundle and the CE. The point tangent to the CE is your secondcompensated bundle (B).

IE

Y1

Y

SE

B

A Y is relatively moreexpensive




Tip IV: Here since Y is inferior we know that it must be the case that X is normal, which givesus the correct positions of X.

Px

Y

TEY

Y

X

3- Determine the location of the final bundle (C). Take into

consideration the direction of the IE and the direction of theTE.

IE

Y

SE

C

A

Greater purchasingpower and Y is inferior.


Y2

Y1

IE

SE

Yc

B



Px

TE

Y

X

4- Draw the initial and final ICs. Make sure that they do not

cross.

IESEA

B


CY2

Y1

TE SE

YcIE

Y

Y YThe total effect is theone we can observe.



When Y is normal the TE depends on the magnitude of each effect.

Y

X

C

A

Y

X

CA

B

|SE|>|IE||SE|<|IE|

Cross Price Effect: Y Normal, Px

B

Tip V: Here since Y is normal, if we don’t have any further information on X then do not worryabout the location of those bundles.

Y2

Y1TE

SE

YcIE

Y2

Y1TE

SEYc

IE

guide to drawing the graphs (1)

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