Indifference Curve maps consumer preferences between two goods. It shows different combinations of goods that provide equal satisfaction. Indifference curves are downward sloping and convex since marginal rate of substitution diminishes. An indifference map consists of multiple indifference curves showing higher satisfaction as one moves to the northeast. The budget line represents affordable combinations given prices and income. Consumer equilibrium occurs where an indifference curve is tangent to the budget line, allowing maximum satisfaction within constraints.

1. Indifference Curve
 Contents:
 History
Presenters
 Definition Sonia Shekdar
 Properties/Characteristics Nabeel Haider
 Indifference Curve MAP Fahad Hafeez
Umair Laiq
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2. HISTORY
 Indifference Curve Theory was presented by
Francis Ysidro Edgeworth, Vilfredo Pareto in the
first part of the 20th century.
 This theory is derived from Ordinal Utility i.e
“Utility which is comparable, not
measurable”
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3. Definition
 “Different combination of two given
products, giving the same or indifferent
levels of satisfaction”.
 The shape of Indifference Curve is convexed
due to diminishing marginal rate of substitution.
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4. MRSxy
 Diminishing Marginal Rate of Substitution “In
order to get 1 additional unit of bats, how many
units of shirts will be sacrificed”
SHIRTS BATS
1 2
2 1
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5. Characteristics/Properties
 Downward sloping curve
 Convexity
 Never Intersect
 Never touching axes
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6. Convexity Negatively Slopping
Never Intersecting Never Touching Axces
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7. Indifference Map
 Collection of Indifference curves possessed by
an individual.
Good Y
IC5
IC4
IC3
IC2
IC1
Good X
IC5> IC4> IC3> IC2> IC1 LOGO

8. Budget Line
 Contents:
 Definition
 Overspending, Saving & Budget Constraint
 Change in Consumer Income & Budget Line
 Change in Price of the Good & Budget Line
 Example
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9. Budget Line
“Represents the combinations of goods and
services that a consumer can purchase given
current prices with his or her income”.
A consumer is willing is spend the limited
amount which he/she has.
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10. 75
OVERSPENDING
60
45
SAVING
25 40 55
•Buget Constraint Rs.100
•Overspending Rs.130 i.e Rs.30 more spent
•Savings Rs.70 i.e Rs.30 saved LOGO

11. Change in consumer income and the
budget line
 If consumer income increases there will be an
outward shift in the budget line as the purchasing
power increases.
Good Y
Good X LOGO

12. in price of a good and budget line
Formula M= Pxx + Pyy
 m = money income allocated to consumption
(after saving and borrowing)
 Px = the price of a specific good
 Py = the price of all other goods
 x = amount purchased of a specific good
 y = amount purchased of all other goods
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13. Py is constant Px Py is constant Px
PY Px is constant PY Px is constant
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14. EXAMPLE:
400= 20X+10Y 40
Slope= -20/10 = -2
X= 400/20= 20
Y= 400/10 =40
10
400=20X+40Y
Slope= -20/40= -1/2
X= 400/20= 20
Y= 400/40= 10
M= Pxx + Pyy
400= 20 X + 5y 2
Slope= -20/5 = -4 0
X= 400/20 = 20
Y =400/5= 80 80
400= 10 X + 5 Y
Slope= -10/5 = -2
X= 400/10 = 40
Y = 400/5= 80
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20 40

15. Consumer Equilibrium
 Contents:
 Definition
 Example
 Explanation Presenter
Nabeel Haider
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16. Consumer Equilibrium
 Consumer equilibrium is comprised of two
concepts:
 The utility function
 The budget constraint
 Consumer equilibrium can be defined as
“ a consumption bundle that is feasible given a
particular budget constraint and maximizes total
utility”.
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17. Consumer Equilibrium
 If there was no budget constraint, a person
would consume each good to the point where
marginal utility of consumption for each good is
zero.
 Given a budget constraint, the consumer
maximizes total utility by consuming a bundle
that is feasible.
 A feasible bundle is one that lies either on or inside
the budget constraint.
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18. Consumer Equilibrium Example
 Suppose we have the following utility function:
 U = u(x1,x2) = x1 * x2
• Where x1 is equal to the number of hotdogs consumed
• Where x2 is equal to the number of sodas consumed
 Suppose we have the following budget
constraint:
 I = p1*x1 + p2*x2
• Where p1 is equal to the price of hotdogs consumed
• Where p2 is equal to the price of sodas consumed
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19.  Now consider that you have a price of hotdogs
equal to $2 and a price of soda is a $1.
 Also suppose that our income is $10.
 Examine the different indifference curves of U =
1, U=12.5, and U = 25
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20. Consumer Equilibrium Cont.
x2
10
U = 25
5
U = 12.5
1
U=1
1 2.5 5 x1
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21. Consumer Equilibrium Cont.
 Intuitively what we have done in the graph is
equate the tradeoff from prices to the tradeoff in
utility.
 I.e., (p2/p1) = (MU2/MU1)
• Where p2 is the price of good 2 and p1 is the price of good 1
• Where MU2 is the marginal utility of consuming good 2 and
MU1 is the marginal utility of consuming good 1
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22. INCOME EFFECT
 Contents:
 Definitions
• Income Effect
• Income Consumption Curve (ICC) Presenter
• Normal Goods Fahad Hafeez
• Inferior Goods
 Assumptions
 Cases
• Normal – Normal
• Normal – Inferior
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23. Income Effect On Consumer Equilibrium
 Income Effect is the effect on the consumer
equilibrium exclusively as a result of change in the
nominal income, all prices remaining constant.
 If the prices of goods, tastes and preferences of the
consumer remain constant and there is a change in his
income, it will directly affect consumer’s equilibrium.
 Satisfaction level increases with increase in Income.
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24. Income Consumption Curve
 It is the locus of consumer equilibrium at different
income levels
 If we draw a line which touches all the consumer
equilibrium points so we will get Income
Consumption Curve (ICC).
 ICC shows how the consumption of two goods is
affected by change in income when prices are
constant.
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25. Normal Goods
 A good for which demand increases as incomes
increase
Inferior Goods
 a good that decreases in demand when
consumer income rises, unlike normal goods
 E.g. Second Hand Clothes
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26. INCOME EFFECT
 Assumptions:
 Two goods world
 No saving
 Normal Income is variable
 Economic Rationality
 Price of the given products are constant
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27. Normal - Normal
 A rise in the income of a
consumer shifts the Budget line
to the right upward on higher IC.
 A rise in the Income make possible for a consumer
to get higher units of both commodities resulting in
higher level of satisfaction and equilibrium point go
upward.
 A fall in the income shifts the
Budget line to the left side on
lower IC.
 A fall in the income results a fall in the buying of
both the commodities which results in lower level of
satisfaction and equilibrium point move downward. LOGO

28. Example
 Now Consider two normal good Rice (X) and
Spice (Y)
Spice
(boxes)
20
Income
Rice Consumption/ Spice
Month Consumption/Month 15
Rs 2500 10Kg 15Boxes
E2
Rs 3000 15Kg 20Boxes
E1 IC2
IC1
10Kg 15Kg
Rice (Kg)
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29. Normal - Inferior
 The good which is purchased less with the increase in
income is called Inferior Good
 Considering X as an Inferior good, x will be
reduced with the increasing income.
Normal
ICC
E3
y2 E2 IC3
y
E1 IC2
y1
x
IC1
LOGO
x2 x1
Inferior

30. Example
 Now Consider two goods
Pulses (X) - Inferior
Beef (Y) - Normal
Beef
Income
ICC
Pulses Consumption/ Beef
Month Consumption/Month y3
E3
Rs 2500 10Kg 5Kg
y2 E2 IC3
Rs 3000 8Kg 9Kg y
E1 IC2
y1
Rs 4000 5Kg 15Kg
x
IC1
x3 x2 x1
Pulses
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31. PRICE EFFECT
 Contents:
 Definitions
• Price Effect
• Price Consumption Curve (PCC) Presenter
• Giffen Goods Umair Laiq
 Assumptions
 Cases
• Normal – Normal
• Normal – Inferior
• Normal – Giffen
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32. PRICE EFFECT
 Price Effect is the effect on the consumer
equilibrium exclusively as a result of change in
the price of one commodity while price of other
good and income of the consumer remaining
constant.
 The change in demand in response to a change
in price of a commodity, other things remaining
the same (Ceteris Paribus), is called Price effect.
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33. Price Consumption Curve
 If we draw a line which touches all the consumer
equilibrium points so we will get Price
Consumption Curve (PCC)
 PCC shows how the consumption of good X
changes, as its price changes, remaining
constant the price of good Y and the income of
the consumer.
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34. Giffen Goods
 Giffen goods are goods for which the demand
rises as the price rises, thereby inverting the
usual negative relationship between price and
demand. The existence of such goods was
postulated by the economist Robert Giffen.
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35. PRICE EFFECT
 Assumptions:
 Two goods world
 No saving
 Normal Income is constant
 Economic Rationality
 Price of any one product is variable
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36. Normal - Normal
Px
(Normal)
Slope = (Px/Py)
Real Income
PCC
E2
E1
IC2
IC1
PE x
X X’ (Normal)
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37. Normal - Inferior
(Normal)
Px
Slope = (Px/Py)
PCC
Real Income
E2
Y’
PEy
Y E1 IC2
IC1
PEx
X X’ (inferior)
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38. Normal - Giffen
(Normal)
Px
PCC Slope = (Px/Py)
Real Income
E2
Y’
IC2
PEy
Y
E1
IC1
PEx
X’ X (Giffen)
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39. Sources
 http://www.bized.co.uk/virtual/vla/theories/indifference_curve.htm
 http://www.spiritus-temporis.com/indifference-curve/history.html
 http://en.wikipedia.org/wiki/Indifference_curve
 K.K Dewett bk
 http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_3/PThy_Chap
ter_3.html
 http://www.scribd.com/doc/3038246/Ch-5-EFFECTS-ON-CONSUMER-EQUILIBRIUM
 www.albany.edu/faculty/schen/L6.pdf
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40. LOGO