Managerial economics, objectives of the business firm, fundamental economic concepts, law of demand, demand elasticity, demand forecasting, consumer behaviour. Plotting the budget constraint is a fairly simple process. We know that the higher the indifference curve, the higher is the utility, and thus, utility maximizing consumer will strive to reach the highest. Refer to the indifference curvebudget line diagram below.
Pdf present paper the second chapter in the book economic analysis. Perfect competition and monopoly, monopolistic competition and. To maximise utility, the consumer can choose on ic1, 20 apples, 10 bananas. Since an infinite number of indifference curves exist, even if only a few of them are drawn on any given diagram, there will always exist one indifference curve that touches the.
Let us understand this with the example of apples and bananas. Budget line is drawn with the assumptions of constant income of consumer and constant prices of the commodities. When the budget line is tangent to the indifference curve, it means that at the point of equilibrium, tire slope of the indifference curve and of the budget line should be equal. Economics is the study of choices made under constraints, usually the constraints of budgets, prices, and input costs. On this new budget line, utility is maximized at c. The first shows a general budget line and the second shows the budget line for the situation where income is 120, the price of x is 10 and the price of y is 5. Return to the situation of lillys choice between paperback books and doughnuts. The easiest way to find these points is to plot the intercepts and connect the dots. Medicare is not a voucher program as the term is generally defined in this book. Government budget and economy class 12 notes economics.
The actual choices they will make, however, depends on their income. Combining janet bains budget line and indifference curves from figure 7. A change in income is represented in an indifference curve diagram as a parallel shift of the budget line. Cbse class12 economics revision notes macro economics 08 government budget and economy class 12 notes economics. Show the income and substitution effect of the decrease in the consumption of soda as the price of soda increases. The indifference curve shows the different combinations of two substitutes goods that yield the same level of satisfaction utility to the consumer. The gradient of the budget line reflects the relative prices of the two products i. Budget line with food stamps budget line with cash transfer original budget line. The highest achievable indifference curve touches the budget constraint at a single point of tangency. As economic life and the economy go through changes, the need to ground education in childrens own experience becomes. Indifference curvesbudget lines a c b d e income 100 income 140 income 124 utility 714 utility 892 q2 q1 economics 101 spring 2001 section 4 hallam exam 2a blue for questions 16 consider the diagram below.
The line represents the set of bundles that this person can afford if she spends all of her income on goods x and y. The budget constraint shows the consumers ability to purchase goods. Economics 301 homework 3 answer key fall 2006 stacy dickertconlin 1. To understand how the consumer reaches his equilibrium using the ordinal approach we need to understand the following terms. We know that curriculum development is a continuous process on which textbooks are written. Suppose that a consumer initially faces budget line bl1, and thus, by choosing consumption point c, is able to achieve the utility level associated with ic1. Economics is the social science that studies the production, distribution, and consumption of goods and services.
In this case, the total own price effect is to increase. To plot the new budget line, find the new intercepts. The choice of h with three books and 70 doughnuts on indifference curve ul is a wasteful choice. This chapter focuses on the core processes of budget preparation, and on mechanisms for aggregate expenditure control and strategic allocation of resources. David albouy expected utility and insurance in a two state model 1 expected utility 1. Microeconomics, budget line, final exam practice problems the attached pdf file has better formatting.
A new budget line would have to be drawn if either a income of the consumer changes, or b price of the commodity changes. Topics covered include consumer demand, production, exchange, the price system, resource allocation, and government intervention. You need to monitor the people and processes that have an impact on the development problem that you want to address and gather evidence. A budget line is that part of the budget set, which highlights all possible combinations of two commodities and focuses on the expenditure of total income. If you are spending all of your money on good 2, then increasing the price of good 1 doesnt change the maximum amount of good 2 you could buythus the vertical intercept of the budget line doesnt change. Addressing operational efficiency and performance issues. The budget line is b1 this shows maximum consumption with current income. This is effectively a map of future expenditures, with all the constituent expenditures individually noted and quantified. The indifference curve approach managerial economics. But the points that lie both below and above this budget line also have significance. Then use the evidence to target the persons that makes the. Utility maximization subject to a budget constraint. Efficiency and performance issues are discussed in chapter 15. The diagram plotting all these indifference curves is called indifference map of the.
Any logical and formative suggestions for improvement will be considered with care. A change in the prices of one or both products with nominal income budget remaining the same. Since an infinite number of indifference curves exist, even if only a few of them are drawn on any given diagram, there will always exist one indifference curve that touches the budget line at a single point of tangency. Demand is a schedule, graph or equation showing the amounts of a good. This is a microeconomic theory book designed for upperdivision undergraduate. Principles of microeconomicsindifference curves wikibooks. Pdf engineering economics analysis 8th ed cristian. Different decisions are made by different people at each step of the budget process. By joining all these points, we get a straight line ab known as the budget line or price line.
This information provides the basis for the budget line shown in. May 23, 2020 another way to see how the budget line changes is to use the trick described earlier for drawing the budget line. Income and substitution effects a quick introduction to be clear about this, this chapter will involve looking at price changes and the response of a utility maximizing consumer to these price changes. The book consists of 10 chapters summing up the basic spheres of economic theory. Budget is a financial statement showing the expected receipt and expenditure of govt. Apr 19, 2009 microeconomics, managerial economics, indifference curve, budget line related links. Cardinal utility analysis can be used to derive demand curve for a commodity. Microeconomics, budget line, final exam practice problems. The pricedemand relationship in case of a giffen good is illustrated in fig. This is shown below for the situation where ux,yx0. The budget constraint can be represented in the xy space.
Economic growth can also be illustrated with a production possibilities curve. Pdf this paper aims to provide a swift tour of the economic issues. Intermediate microeconomics notes and assignment chapter 5. With a fall in price of the good, the consumer shifts to point r on indifference curve ic 2. Because budget and prices are prone to change, joses budget line can shift and pivot. A budget line shows the combinations of two products that a consumer can afford to buy with a given income using all of their available budget the gradient of the budget line reflects the relative prices of the two products the gradient of a budget line reveals the opportunity cost the budget line will shift when there is. This slope tells us how much good 1 we must give up to get an additional unit of good 2. The budget line set, slope and shift microeconomics.
Apr 10, 2019 before turning to the economics definition of budget line, consider another concept. However, it is not affordable given lillys budget constraint. An indifference curve is a line showing all the combinations of two goods which give a consumer equal utility. An increase in income would shift the budget line to the right. Each intercept represents a case where jose spends all of his budget on either tshirts or movies. It is also important to remember that the slope of the budget line is equal to the ratio of the prices of two goods. Indifference curves and budget lines economics help. No, the slope of the indifference curve is the marginal rate of substitution whereas the slope of the budget line is the economic rate of substitution. In most books, students look at a lot of diagrams of shifting curves. To do this, we must chart the consumers budget constraint. The following graph shows a few of his indifference curves. With a certain given priceincome situation depicted by the budget line pl 1, the consumer is initially in equilibrium at q on indifference curve ic 1. In principle the book covers the whole range of problems discussed in the general economics course.
It means that reduction of consumers income by the amount pa in terms of y or lb in terms of x has been made so as to keep him on the same indifference curve. Oct 19, 2018 a budget line is that part of the budget set, which highlights all possible combinations of two commodities and focuses on the expenditure of total income. Cardinal analysis, ordinal analysis, production function, economies of scale, cost concepts, price determination. Income and substitution effects a quick introduction.
As economic life and the economy go through changes, the need to ground education in childrens own experience becomes essential. The indifference map shows peoples preferences for the combination of two goods. To understand how households make decisions, economists look at what consumers can afford. The solutions manual, with which the authors were also involved, contains answers for all.
Spring 2001 econ 11lecture 2 9 budget constraints with more than two goods we can expand the bundle of goods to three or more goods budget line. Now decrease the price of good 1 so the budget line becomes df. While doing so, it is imperative to provide them opportunities to acquire analytical. Introduction to indifference curves and budget lines economics. Every point on this budget line indicates those bundles of apples and bananas, which the consumer can purchase by spending his entire income of f 20 at the given prices of goods. The budget line is an important element analysis of consumer behavior. It works on the principle of sacrificing one commodity to acquire more of the other goods within a limited income and at a specified market price. Suppose the price of hot dogs is 1, the price of hamburgers is 2, and the consumers income is 20. It identifies the options from which the consumer can choose the combination of goods. This exercise book is developed for those students who study general economics course while being enrolled in noneconomic study programs and schools. Along with the budget line are shown the three indifference curves from. Thus, the budget line reflects the familiar and pervasive economic fact of scarcity as it pertains to the individual con sumer. The analysis of changes in price presented in the book follows the discussion of income.986 831 1387 696 393 1432 109 916 209 528 628 748 668 432 1044 229 1249 1041 387 55 1547 511 648 277 979 1126 1429 977 765 1532 703 1250 876 710 363 183 385 1319 344 473 251