Indifference Analysis
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Indifference Analysis
Indifference analysis
Indifference curves
Constructing an indifference curve Pears Oranges 30 24 20 14 10 8 6
6 7 8 10 13 15 20
Point a b c d e f g
Combinations of pears and oranges that Clive likes the same amount as 10 pears and 13 oranges
Constructing an indifference curve
Pears
30 28 26
Pears Oranges 30 24 20 14 10 8 6
24 22 20 18 16 14 12 10 8 6
Point a b c d e f g
6 7 8 10 13 15 20
4 2 0 0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Constructing an indifference curve
Pears
30 28 26
a Pears Oranges 30 24 20 14 10 8 6
24 22 20 18 16 14 12 10 8 6
Point a b c d e f g
6 7 8 10 13 15 20
4 2 0 0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Constructing an indifference curve
Pears
30 28 26
a Pears Oranges
b
24 22 20 18 16 14 12 10 8 6
30 24 20 14 10 8 6
Point a b c d e f g
6 7 8 10 13 15 20
4 2 0 0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Constructing an indifference curve
Pears
30 28 26
a Pears Oranges
b
24 22 20 18 16 14 12 10 8 6
30 24 20 14 10 8 6
c
d
e
Point a b c d e f g
6 7 8 10 13 15 20
f g
4 2 0 0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Deriving the marginal rate of substitution (MRS) 30
a MRS = 4 b
∆Y = 4 26
Units of good Y
∆X = 1
MRS = ∆Y/∆X
20
10
0 0
67
10
Units of good X
20
Deriving the marginal rate of substitution (MRS) 30
a MRS = 4 b
∆Y = 4 26
Units of good Y
∆X = 1
MRS = ∆Y/∆X
20
10 9
∆Y = 1
c
MRS = 1 d
∆X = 1
0 0
67
10
13 14
Units of good X
20
An indifference map
Units of good Y
30
20
10
I5 I2
I1
0 0
10
Units of good X
20
I3
I4
The impossibility of two indifference curves crossing
Units of good Y
30
20
a 10
b I1
0 0
10
Units of good X
20
The impossibility of two indifference curves crossing
Units of good Y
30
20
a 10
I2
b
I1
0 0
10
Units of good X
20
The impossibility of two indifference curves crossing
Units of good Y
30
20
a 10
c I2
b
I1
0 0
10
Units of good X
20
Indifference analysis
Budget lines
A budget line Units of good X
Units of good Y
0 5 10 15
30 20 10 0
Assumptions PX = £2 PY = £1 Budget = £30
A budget line
a
30
Units of good Y
Units of good X
Units of Point on good Y budget line
0 5 10 15
20
30 20 10 0
a
Assumptions
10
PX = £2 PY = £1 Budget = £30
0 0
5
10
Units of good X
15
20
A budget line
a
30
Units of good Y
Units of good X 0 5 10 15
b
20
Units of Point on good Y budget line 30 20 10 0
a b
Assumptions
10
PX = £2 PY = £1 Budget = £30
0 0
5
10
Units of good X
15
20
A budget line
a
30
Units of good Y
Units of good X 0 5 10 15
b
20
Units of Point on good Y budget line 30 20 10 0
c
10
a b c
Assumptions PX = £2 PY = £1 Budget = £30
0 0
5
10
Units of good X
15
20
A budget line
a
30
Units of good Y
Units of good X 0 5 10 15
b
20
Units of Point on good Y budget line 30 20 10 0
c
10
a b c d
Assumptions PX = £2 PY = £1 Budget = £30
d
0 0
5
10
Units of good X
15
20
Effect of an increase in income on the budget line 40
Units of good Y
30
20 Assumptions
10
PX = £2 PY = £1 Budget = £30
0 0
5
10
Units of good X
15
20
Effect of an increase in income on the budget line 40
Assumptions PX = £2 PY = £1 Budget = £40
Units of good Y
30
n
20
m
16
10
Budget = £40 Budget = £30
0 0
5
7
10
Units of good X
15
20
Effect on the budget line of a fall in the price of good X 30
Units of good Y
Assumptions PX = £2 PY = £1 Budget = £30
20
10
0 0
5
10
15
20
Units of good X
25
30
Effect on the budget line of a fall in the price of good X 30
Units of good Y
Assumptions PX = £2 PY = £1 Budget = £30
20
10
0 0
5
10
15
20
Units of good X
25
30
Effect on the budget line of a fall in the price of good X 30
Units of good Y
Assumptions PX = £1 PY = £1 Budget = £30
20
10
0 0
5
10
15
20
Units of good X
25
30
Effect on the budget line of a fall in the price of good X
a
30
Units of good Y
Assumptions PX = £1 PY = £1 Budget = £30
20
10
B2
B1
c
b
0 0
5
10
15
20
Units of good X
25
30
Indifference analysis
The optimal level of consumption
Units of good Y
Finding the optimum consumption
O Units of good X
Units of good Y
Finding the optimum consumption
I5
I1
O Units of good X
I2
I3
I4
Units of good Y
Finding the optimum consumption
Budget line
I5
I1
O Units of good X
I2
I3
I4
Finding the optimum consumption r
Units of good Y
s
Y1
t
u
I5 v
O
I1 X1 Units of good X
I2
I3
I4
Indifference analysis
Effects of a change in income
Units of good Y
Effect on consumption of a change in income
a
B1 O Units of good X
I1
Units of good Y
Effect on consumption of a change in income
B1
B2
O Units of good X
I1
I2
Units of good Y
Effect on consumption of a change in income
I3
B1
B2
B3
O Units of good X
B4
I1
I2
I4
Units of good Y
Effect on consumption of a change in income
Income-consumption curve
I3
B1
B2
B3
O Units of good X
B4
I1
I2
I4
Bread
Deriving an Engel curve from an income-consumption curve
B1
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Income-consumption curve
B1
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Income-consumption curve
B1
B2
I1
I2
I3
B3
Income (£)
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Income-consumption curve
a
Qb1
B1
Income (£)
Qcd1
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Income-consumption curve
a
Qb1
B1
Income (£)
Qcd1
Y1
I2 B3
CDs
a
Qcd1
B2
I1
I3
Bread
Deriving an Engel curve from an income-consumption curve
Qb2 Qb1
a
b
Income-consumption curve
B1
Income (£)
Qcd1 Qcd2
Y2 Y1
b a
Qcd1 Qcd2
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Qb3 Qb2 Qb1
a
b
Income-consumption c curve
B1
Income (£)
Qcd1 Qcd2 Qcd3
Y3 Y2 Y1
b
c
a
Qcd1 Qcd2 Qcd3
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Qb3 Qb2 Qb1
a
b
Income-consumption c curve
B1
B2
I1
I2 B3
Income (£)
Qcd1 Qcd2 Qcd3
Y3 Y2 Y1
CDs Engel curve
b
c
a
Qcd1 Qcd2 Qcd3
I3
Units of good Y (normal good)
Effect of a rise in income on the demand for an inferior good
a B1 O
Units of good X (inferior good)
I1
Effect of a rise in income on the demand for an inferior good
Units of good Y (normal good)
b
I2
a B1 O
Units of good X (inferior good)
I1
B2
Effect of a rise in income on the demand for an inferior good
Income-consumption curve Units of good Y (normal good)
b
I2
a B1 O
Units of good X (inferior good)
I1
B2
Indifference analysis
Effects of a change in price
Effect of a fall in the price of good X 30
Units of good Y
Assumptions PX = £2 PY = £1 Budget = £30
20
10
0 0
5
10
15
20
Units of good X
25
30
Effect of a fall in the price of good X 30
Units of good Y
Assumptions PX = £2 PY = £1 Budget = £30
20
j 10
I1
B1
0 0
5
10
15
20
Units of good X
25
30
Effect of a fall in the price of good X 30
Units of good Y
Assumptions PX = £1 PY = £1 Budget = £30
20
j 10
I1
B1
0 0
5
10
15
20
Units of good X
25
30
Effect of a fall in the price of good X 30
a
Units of good Y
Assumptions PX = £1 PY = £1 Budget = £30
20
k j 10
I2
I1
B1
0 0
5
10
15
20
Units of good X
25
B2 30
Effect of a fall in the price of good X
Units of good Y
30
a
Price-consumption curve
20
k j 10
I2
I1
B1
0 0
5
10
15
20
Units of good X
25
B2 30
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve
a
B1
I1
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve Fall in the price of X a
b
B1
B2
I1
I2
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve Further falls in the price of X a
b
B1
B2
I1
I2
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve Further falls in the price of X a
b
c
B1
d
B2
B3
I I1 2 B4
I3
I4
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve
a
b
c
B1
d
Price-consumption curve
B2
B3
I I1 2 B4
I3
I4
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve
a
b
c
B1
d
Price-consumption curve
B2
B3
I I1 2 B4
I3
I4
Price of good X
Units of good X P1
a
Q1
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve
a
b
c
d
B1
Price-consumption curve
B2
B3
I I1 2 B4
I3
I4
Price of good X
Units of good X P1
P2 P3 P4
a
b c
d
Q1 Q2 Q3 Q4
Demand Units of good X
Indifference analysis
Income and substitution effects of a change in price: (a) normal good
Units of good Y
Income and substitution effects: normal good
f
I1 I2
B1 QX1
I3 I4 I5 I6
Units of Good X
Income and substitution effects: normal good
Units of good Y
Rise in the price of good X
h f
I1 I2
B2 QX3
QX1
B1
I3 I4 I5 I6
Units of Good X
Income and substitution effects: normal good
Units of good Y
Substitution effect of the price rise
g h f
I1 I2
B2 QX3
QX2
QX1
Substitution effect
B1a
B1
I3 I4 I5 I6
Units of Good X
Income and substitution effects: normal good
Units of good Y
Income effect of the price rise
g h f
I1 I2
B2 QX3
QX2
Incom e
QX1
Substitution effect
B1a
B1
I3 I4 I5 I6
Units of Good X
Indifference analysis
Income and substitution effects of a change in price: (b) inferior good
Units of good Y
Income and substitution effects: Inferior (non-Giffen) good
f
I1 I2
B1
QX1 Units of Good X
Income and substitution effects: Inferior (non-Giffen) good
Units of good Y
Rise in the price of good X
f h
I1
B2 QX3
I2
B1
QX1 Units of Good X
Units of good Y
Income and substitution effects: Inferior (non-Giffen) good
Substitution effect of the price rise
g
f h
I1
B2 QX2
B1a
I2
B1
QX1
Substitution effect
Units of Good X
Income and substitution effects: Inferior (non-Giffen) good
Income effect of the price rise
Units of good Y
g
f h
I1
B2 QX2 QX3 Income effect
B1a
I2
B1
QX1
Substitution effect
Units of Good X
Indifference analysis
Income and substitution effects of a change in price: (c) Giffen good
Units of good Y
Income and substitution effects: Giffen good
f
I1
I2
B1
QX1 Units of Good X
Income and substitution effects: Giffen good
Units of good Y
Rise in the price of good X
f
I1 h
B2
I2
B1
QX1QX3 Units of Good X
Units of good Y
Income and substitution effects: Giffen good
Substitution effect of the price rise
g f
I1 h
B2
B1a
I2
B1
QX2 QX1QX3 Substitution effect
Units of Good X
Income and substitution effects: Giffen good
Income effect of the price rise
Units of good Y
g f
I1 h
B2
B1a
I2
B1
QX2 QX1QX3 Income effect
Substitution effect
Units of Good X
Indifference analysis
Characteristics theory
Choice between brands: characteristics approach
Quantity of characteristic A
Brand 1
QA1
Brand 2
x1
Quantities of any one of three brands that can be purchased for a given budget at current prices: Brand 1 is chosen Brand 3
x2
x3
I5
I1 QB1 Quantity of characteristic B
I2
I3
I4
Choice between brands: characteristics approach
Quantity of characteristic A
Brand 1
Brand 2 Effect of reductions in the price of Brand 2: Brand 2 is now chosen
x1
Brand 3 QA5 x2
x4
x5
x3
I5
I1 QB5 Quantity of characteristic B
I2
I3
I4
Indifference analysis
Indifference curves
Constructing an indifference curve Pears Oranges 30 24 20 14 10 8 6
6 7 8 10 13 15 20
Point a b c d e f g
Combinations of pears and oranges that Clive likes the same amount as 10 pears and 13 oranges
Constructing an indifference curve
Pears
30 28 26
Pears Oranges 30 24 20 14 10 8 6
24 22 20 18 16 14 12 10 8 6
Point a b c d e f g
6 7 8 10 13 15 20
4 2 0 0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Constructing an indifference curve
Pears
30 28 26
a Pears Oranges 30 24 20 14 10 8 6
24 22 20 18 16 14 12 10 8 6
Point a b c d e f g
6 7 8 10 13 15 20
4 2 0 0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Constructing an indifference curve
Pears
30 28 26
a Pears Oranges
b
24 22 20 18 16 14 12 10 8 6
30 24 20 14 10 8 6
Point a b c d e f g
6 7 8 10 13 15 20
4 2 0 0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Constructing an indifference curve
Pears
30 28 26
a Pears Oranges
b
24 22 20 18 16 14 12 10 8 6
30 24 20 14 10 8 6
c
d
e
Point a b c d e f g
6 7 8 10 13 15 20
f g
4 2 0 0
2
4
6
8
10
12
Oranges
14
16
18
20
22
Deriving the marginal rate of substitution (MRS) 30
a MRS = 4 b
∆Y = 4 26
Units of good Y
∆X = 1
MRS = ∆Y/∆X
20
10
0 0
67
10
Units of good X
20
Deriving the marginal rate of substitution (MRS) 30
a MRS = 4 b
∆Y = 4 26
Units of good Y
∆X = 1
MRS = ∆Y/∆X
20
10 9
∆Y = 1
c
MRS = 1 d
∆X = 1
0 0
67
10
13 14
Units of good X
20
An indifference map
Units of good Y
30
20
10
I5 I2
I1
0 0
10
Units of good X
20
I3
I4
The impossibility of two indifference curves crossing
Units of good Y
30
20
a 10
b I1
0 0
10
Units of good X
20
The impossibility of two indifference curves crossing
Units of good Y
30
20
a 10
I2
b
I1
0 0
10
Units of good X
20
The impossibility of two indifference curves crossing
Units of good Y
30
20
a 10
c I2
b
I1
0 0
10
Units of good X
20
Indifference analysis
Budget lines
A budget line Units of good X
Units of good Y
0 5 10 15
30 20 10 0
Assumptions PX = £2 PY = £1 Budget = £30
A budget line
a
30
Units of good Y
Units of good X
Units of Point on good Y budget line
0 5 10 15
20
30 20 10 0
a
Assumptions
10
PX = £2 PY = £1 Budget = £30
0 0
5
10
Units of good X
15
20
A budget line
a
30
Units of good Y
Units of good X 0 5 10 15
b
20
Units of Point on good Y budget line 30 20 10 0
a b
Assumptions
10
PX = £2 PY = £1 Budget = £30
0 0
5
10
Units of good X
15
20
A budget line
a
30
Units of good Y
Units of good X 0 5 10 15
b
20
Units of Point on good Y budget line 30 20 10 0
c
10
a b c
Assumptions PX = £2 PY = £1 Budget = £30
0 0
5
10
Units of good X
15
20
A budget line
a
30
Units of good Y
Units of good X 0 5 10 15
b
20
Units of Point on good Y budget line 30 20 10 0
c
10
a b c d
Assumptions PX = £2 PY = £1 Budget = £30
d
0 0
5
10
Units of good X
15
20
Effect of an increase in income on the budget line 40
Units of good Y
30
20 Assumptions
10
PX = £2 PY = £1 Budget = £30
0 0
5
10
Units of good X
15
20
Effect of an increase in income on the budget line 40
Assumptions PX = £2 PY = £1 Budget = £40
Units of good Y
30
n
20
m
16
10
Budget = £40 Budget = £30
0 0
5
7
10
Units of good X
15
20
Effect on the budget line of a fall in the price of good X 30
Units of good Y
Assumptions PX = £2 PY = £1 Budget = £30
20
10
0 0
5
10
15
20
Units of good X
25
30
Effect on the budget line of a fall in the price of good X 30
Units of good Y
Assumptions PX = £2 PY = £1 Budget = £30
20
10
0 0
5
10
15
20
Units of good X
25
30
Effect on the budget line of a fall in the price of good X 30
Units of good Y
Assumptions PX = £1 PY = £1 Budget = £30
20
10
0 0
5
10
15
20
Units of good X
25
30
Effect on the budget line of a fall in the price of good X
a
30
Units of good Y
Assumptions PX = £1 PY = £1 Budget = £30
20
10
B2
B1
c
b
0 0
5
10
15
20
Units of good X
25
30
Indifference analysis
The optimal level of consumption
Units of good Y
Finding the optimum consumption
O Units of good X
Units of good Y
Finding the optimum consumption
I5
I1
O Units of good X
I2
I3
I4
Units of good Y
Finding the optimum consumption
Budget line
I5
I1
O Units of good X
I2
I3
I4
Finding the optimum consumption r
Units of good Y
s
Y1
t
u
I5 v
O
I1 X1 Units of good X
I2
I3
I4
Indifference analysis
Effects of a change in income
Units of good Y
Effect on consumption of a change in income
a
B1 O Units of good X
I1
Units of good Y
Effect on consumption of a change in income
B1
B2
O Units of good X
I1
I2
Units of good Y
Effect on consumption of a change in income
I3
B1
B2
B3
O Units of good X
B4
I1
I2
I4
Units of good Y
Effect on consumption of a change in income
Income-consumption curve
I3
B1
B2
B3
O Units of good X
B4
I1
I2
I4
Bread
Deriving an Engel curve from an income-consumption curve
B1
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Income-consumption curve
B1
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Income-consumption curve
B1
B2
I1
I2
I3
B3
Income (£)
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Income-consumption curve
a
Qb1
B1
Income (£)
Qcd1
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Income-consumption curve
a
Qb1
B1
Income (£)
Qcd1
Y1
I2 B3
CDs
a
Qcd1
B2
I1
I3
Bread
Deriving an Engel curve from an income-consumption curve
Qb2 Qb1
a
b
Income-consumption curve
B1
Income (£)
Qcd1 Qcd2
Y2 Y1
b a
Qcd1 Qcd2
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Qb3 Qb2 Qb1
a
b
Income-consumption c curve
B1
Income (£)
Qcd1 Qcd2 Qcd3
Y3 Y2 Y1
b
c
a
Qcd1 Qcd2 Qcd3
B2
I1
I2
I3
B3
CDs
Bread
Deriving an Engel curve from an income-consumption curve
Qb3 Qb2 Qb1
a
b
Income-consumption c curve
B1
B2
I1
I2 B3
Income (£)
Qcd1 Qcd2 Qcd3
Y3 Y2 Y1
CDs Engel curve
b
c
a
Qcd1 Qcd2 Qcd3
I3
Units of good Y (normal good)
Effect of a rise in income on the demand for an inferior good
a B1 O
Units of good X (inferior good)
I1
Effect of a rise in income on the demand for an inferior good
Units of good Y (normal good)
b
I2
a B1 O
Units of good X (inferior good)
I1
B2
Effect of a rise in income on the demand for an inferior good
Income-consumption curve Units of good Y (normal good)
b
I2
a B1 O
Units of good X (inferior good)
I1
B2
Indifference analysis
Effects of a change in price
Effect of a fall in the price of good X 30
Units of good Y
Assumptions PX = £2 PY = £1 Budget = £30
20
10
0 0
5
10
15
20
Units of good X
25
30
Effect of a fall in the price of good X 30
Units of good Y
Assumptions PX = £2 PY = £1 Budget = £30
20
j 10
I1
B1
0 0
5
10
15
20
Units of good X
25
30
Effect of a fall in the price of good X 30
Units of good Y
Assumptions PX = £1 PY = £1 Budget = £30
20
j 10
I1
B1
0 0
5
10
15
20
Units of good X
25
30
Effect of a fall in the price of good X 30
a
Units of good Y
Assumptions PX = £1 PY = £1 Budget = £30
20
k j 10
I2
I1
B1
0 0
5
10
15
20
Units of good X
25
B2 30
Effect of a fall in the price of good X
Units of good Y
30
a
Price-consumption curve
20
k j 10
I2
I1
B1
0 0
5
10
15
20
Units of good X
25
B2 30
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve
a
B1
I1
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve Fall in the price of X a
b
B1
B2
I1
I2
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve Further falls in the price of X a
b
B1
B2
I1
I2
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve Further falls in the price of X a
b
c
B1
d
B2
B3
I I1 2 B4
I3
I4
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve
a
b
c
B1
d
Price-consumption curve
B2
B3
I I1 2 B4
I3
I4
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve
a
b
c
B1
d
Price-consumption curve
B2
B3
I I1 2 B4
I3
I4
Price of good X
Units of good X P1
a
Q1
Units of good X
Expenditure on all other goods
Deriving a demand curve from a price-consumption curve
a
b
c
d
B1
Price-consumption curve
B2
B3
I I1 2 B4
I3
I4
Price of good X
Units of good X P1
P2 P3 P4
a
b c
d
Q1 Q2 Q3 Q4
Demand Units of good X
Indifference analysis
Income and substitution effects of a change in price: (a) normal good
Units of good Y
Income and substitution effects: normal good
f
I1 I2
B1 QX1
I3 I4 I5 I6
Units of Good X
Income and substitution effects: normal good
Units of good Y
Rise in the price of good X
h f
I1 I2
B2 QX3
QX1
B1
I3 I4 I5 I6
Units of Good X
Income and substitution effects: normal good
Units of good Y
Substitution effect of the price rise
g h f
I1 I2
B2 QX3
QX2
QX1
Substitution effect
B1a
B1
I3 I4 I5 I6
Units of Good X
Income and substitution effects: normal good
Units of good Y
Income effect of the price rise
g h f
I1 I2
B2 QX3
QX2
Incom e
QX1
Substitution effect
B1a
B1
I3 I4 I5 I6
Units of Good X
Indifference analysis
Income and substitution effects of a change in price: (b) inferior good
Units of good Y
Income and substitution effects: Inferior (non-Giffen) good
f
I1 I2
B1
QX1 Units of Good X
Income and substitution effects: Inferior (non-Giffen) good
Units of good Y
Rise in the price of good X
f h
I1
B2 QX3
I2
B1
QX1 Units of Good X
Units of good Y
Income and substitution effects: Inferior (non-Giffen) good
Substitution effect of the price rise
g
f h
I1
B2 QX2
B1a
I2
B1
QX1
Substitution effect
Units of Good X
Income and substitution effects: Inferior (non-Giffen) good
Income effect of the price rise
Units of good Y
g
f h
I1
B2 QX2 QX3 Income effect
B1a
I2
B1
QX1
Substitution effect
Units of Good X
Indifference analysis
Income and substitution effects of a change in price: (c) Giffen good
Units of good Y
Income and substitution effects: Giffen good
f
I1
I2
B1
QX1 Units of Good X
Income and substitution effects: Giffen good
Units of good Y
Rise in the price of good X
f
I1 h
B2
I2
B1
QX1QX3 Units of Good X
Units of good Y
Income and substitution effects: Giffen good
Substitution effect of the price rise
g f
I1 h
B2
B1a
I2
B1
QX2 QX1QX3 Substitution effect
Units of Good X
Income and substitution effects: Giffen good
Income effect of the price rise
Units of good Y
g f
I1 h
B2
B1a
I2
B1
QX2 QX1QX3 Income effect
Substitution effect
Units of Good X
Indifference analysis
Characteristics theory
Choice between brands: characteristics approach
Quantity of characteristic A
Brand 1
QA1
Brand 2
x1
Quantities of any one of three brands that can be purchased for a given budget at current prices: Brand 1 is chosen Brand 3
x2
x3
I5
I1 QB1 Quantity of characteristic B
I2
I3
I4
Choice between brands: characteristics approach
Quantity of characteristic A
Brand 1
Brand 2 Effect of reductions in the price of Brand 2: Brand 2 is now chosen
x1
Brand 3 QA5 x2
x4
x5
x3
I5
I1 QB5 Quantity of characteristic B
I2
I3
I4
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