indifference curves and budget lines

• An indifference curve shows all of the combinations of two goods that give the consumer equal satisfaction or utility
• marginal rate of substituion- The rate at which the consumer is willing to substitute one good for another
• The slope of the indifference curve is important – it represents the extent to which the consumer is willing to substitute one good for another
• A budget line shows numerically all the possible combinations of two goods that a consumer can purchase with a given income and given prices of the two goods
• The good is relatively more expensive than alternative goods, and therefore people will switch to other goods which are now relatively cheaper. (substitution effect) 
• The increase in price reduces disposable income and this lower income may reduce demand. (income effect)
• Giffen Goods is a sub-category of inferior goods; its consumption increases when its price increases. This is because of a strong income effect (Real income changes).
• Table Quiz

  
• The income effect has been eliminated by removing the reduction in real income through including an imaginary budget line that is parallel to the new budget line but at a tangent to the original indifference curve
• In reality, consumers have to choose from many more goods than just two. Sometimes they may have to choose between hundreds of goods in the case of everyday food products
• The term ‘indifference’ implies that consumers are willing to accept any combination of the two goods as represented by an indifference curve. Some economists point out that consumers express their wants and needs in terms of preference or rank order, and not indifference
• Indifference curves assume that consumers act rationally. This is not always true
• • Budget Line


  the combination of 2 products obtainable with given income and prices.