The document discusses concepts related to consumer demand, including indifference curves, marginal rate of substitution, budget constraints, and income and substitution effects. It provides examples of how indifference curves illustrate consumer preferences between two goods. It also explains how budget constraints and indifference curves can be used together to find the optimal combination of goods that maximizes consumer utility. Finally, it discusses the income and substitution effects that result from changes in a good's price.

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

4. More of a commodity is better than less

5. Preference of a consumer are transitive

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

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

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

15. An indifference map Units of good Y Units of good X I 1 I 2 I 3 I 4 I 5

19. A budget line Units of good Y Units of good X a b Units of good X 0 5 10 15 Units of good Y 30 20 10 0 Point on budget line a b Assumptions P X = £2 P Y = £1 Budget = £30

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

21. Effect on the budget line of a fall in the price of good X Units of good Y Units of good X Assumptions P X = £1 P Y = £1 Budget = £30 B 1 B 2 a b c

25. The Best Affordable Bundle

26. Finding the optimum consumption I 1 I 2 I 3 I 4 I 5 Units of good Y O Units of good X Budget line

27. indifference curve and budget line I 1 I 2 I 3 I 4 I 5 Units of good Y O Units of good X r s t Y 1 X 1 v u

28. Units of good Y O Units of good X B 1 Effect on consumption of a change in income I 1

29. I 2 Units of good Y O Units of good X B 1 B 2 I 1 Effect on consumption of a change in income

30. I 2 Units of good Y O Units of good X B 1 B 2 B 3 B 4 I 1 I 3 I 4 Effect on consumption of a change in income

31. I 2 Units of good Y O Units of good X B 1 B 2 B 3 B 4 I 1 I 3 I 4 Income–consumption curve Effect on consumption of a change in income

33. Deriving an Engel curve from an income–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 Income-consumption curve Bread Income (£) CDs CDs Q b 3 Q b 2 Q b 1 Y 3 Y 2 Y 1 Q cd 3 Q cd 2 Q cd 1 Q cd 3 Q cd 2 Q cd 1 a b c a b c

34. Deriving an Engel curve from an income–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 Income-consumption curve Bread Income (£) CDs CDs Q b 3 Q b 2 Q b 1 Y 3 Y 2 Y 1 Q cd 3 Q cd 2 Q cd 1 Q cd 3 Q cd 2 Q cd 1 Engel curve a b c a b c

35. Engel Curves Food (units per month) 30 4 8 12 10 Income ($ per month) 20 16 0 Engel curve slopes upward for a normal good.

36. Engel Curves Food (units per month) 30 4 8 12 10 Income ($ per month) 20 16 0 Engel curve is backward bending for inferior goods. Inferior Normal

37. Effect of a rise in income on the demand for an inferior good Units of good Y (normal good) Units of good X (inferior good) O I 1 B 1 a

38. Effect of a rise in income on the demand for an inferior good Units of good Y (normal good) Units of good X (inferior good) O I 2 I 1 B 1 B 2 a b

39. Effect of a rise in income on the demand for an inferior good Units of good Y (normal good) Units of good X (inferior good) O Income–consumption curve I 2 I 1 B 1 B 2 a b

40. Effect of a fall in the price of good X Units of good Y Units of good X Assumptions P X = £2 P Y = £1 Budget = £30 B 1 I 1 j

41. Effect of a fall in the price of good X Units of good Y Units of good X Assumptions P X = £1 P Y = £1 Budget = £30 B 1 I 1 j I 2 B 2 k a

42. Effect of a fall in the price of good X Units of good Y Units of good X B 1 I 1 j I 2 B 2 k Price–consumption curve a

43. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a b c d Further falls in the price of X

44. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a Price - consumption curve b c d

45. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a Price - consumption curve b c d Price of good X Units of good X a b P 1 P 2 Q 1 Q 2

46. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a Price - consumption curve b c d Price of good X Units of good X a b c d P 1 P 2 P 3 P 4 Q 1 Q 2 Q 3 Q 4

47. Deriving a demand curve from a price–consumption curve B 1 B 2 B 3 I 3 I 2 I 1 I 4 B 4 Expenditure on all other goods Units of good X a Price - consumption curve b c d Price of good X Units of good X a b c d Demand P 1 P 2 P 3 P 4 Q 1 Q 2 Q 3 Q 4

51. Response to an income increase: both goods normal C F 100 20 U 1 B 35

52. Income effects C F 100 20 U 1 B 35 F Normal; C inferior C Normal; F inferior Both F and C Normal

54. Decomposing the price change

56. Prices Drop

62. Income and Substitution Effects Illustrated: The Normal-Good Case [Figure 4.3]

64. Income and Substitution Effects: Normal Good Food (units per month) O Clothing (units per month) R F 1 S C 1 A U 1 The income effect, EF 2 , ( from D to B ) keeps relative prices constant but increases purchasing power . Income Effect C 2 F 2 T U 2 B When the price of food falls, consumption increases by F 1 F 2 as the consumer moves from A to B. E Total Effect Substitution Effect D The substitution effect, F 1 E, (from point A to D ) , changes the relative prices but keeps real income (satisfaction) constant.