1. By:
MBA. Nazari Sajad

2.  A more advanced explanation of
consumer behavior and equilibrium is
based on (1) budget lines and (2)so-
called indifference curves.

3.  A budget line (or, more technically,
the budget constraint ) is a schedule
or curve that shows various
combinations of two products a
consumer can purchase with a specific
money income.

4.  If the price of product A is $1.50 and the
price of product B is $1, a consumer could
purchase all the combinations of A and B
shown in Table 1 with $12 of money
income.

5.  At one extreme, the consumer might spend all of
his or her income on 8 units of A and have nothing
left to spend on B. Or, by giving up 2 units of A and
thereby “freeing” $3, the consumer could have 6
units of A and 3 of B. And so on to the other
extreme, at which the consumer could buy 12 units
of B at $1 each, spending his or her entire money
income on B with nothing left to spend on A.

6. 

7. Income: $1,200
Price of X= $40
Price of Y= $30
Equation of the budget line
40
good Y
35
30
25
20
15
10
5
5 10 15 20 25 30 35 40
good X

8.  Effects of Changes in Income
 Effects of Changes in Prices

9.  The location of the budget line varies with money
income.
 An increase in money income shifts the budget line to
the right; a decrease in money income shifts it to the
left.

11.  An indifference curve is the locus of
points representing all the different
combinations of two goods which
yield equal level of utility to the
consumer.

12.  Indifference schedule is a list of
various combinations of commodities
which are equally satisfactory to the
consumer concerned.

15.  The marginal rate of substitution of X for Y
(MRSxy) is defined as the amount of Y, the
consumer is just willing to give up to get one
more unit of X and maintain the same level
of satisfaction.

16.  As the consumer increases the consumption of
apples, then for getting every additional unit of
apples, he will give up less and less of oranges,
that is, 8:1, 4:1, 2:1, 1:1 respectively This is
the Law of Diminishing MRS.

18.  An indifference map is a complete set of
indifference curves.
 It indicates the consumer’s preferences
among all combinations of goods and
services.
 The farther from the origin the indifference
curve is, the more the combinations of goods
along that curve are preferred.

20.  Indifference curves are negatively sloped
Given a combination of commodity X and commodity Y,
with every increase in X, the amount in Y should fall in order
that the level of satisfaction from every combination should
remain the same.
 Indifference curves are convex to the origin
Convexity illustrates the law of diminishing marginal rate of
substitution.
 Indifference curves can never intersect each other
Indifference curves can never intersect each other because
each indifference curve represents a specific level of
satisfaction. If two indifference curves intersect each other,
then at the point of intersection, the consumer is experiencing
two different levels of utility.

21.  A consumer seeks a market basket that generates the
maximum level of happiness. However, one’s money income
and prices of goods imposes a limit on the level of
satisfaction that one may attain. Thus, the income at the
disposal of the consumer in conjunction with prices of the
commodities will determine the budgetary constraint or the
price line.

22.  Consumer equilibrium is attained when, given his budget constraint,
the consumer reaches the highest possible point on the indifference
curve. The maximum satisfaction is yielded when the consumer
reaches equilibrium at the point of tangency between an indifference
curve and the price line. At point E, the price line is tangent to the
indifference curve.
 At the equilibrium point, slope of indifference curve = slope of price
line
 slope of indifference curve = MRS
 slope of price line = PX / PY
 Thus, at point E, MRS = PX / PY
 Thus, satisfaction is maximized when the marginal rate of
substitution of X for Y is just equal to the price of X to the price of Y.