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The Indifference Curve Approach

The Indifference Curve Approach. S.6 Econ. M. Kwong. What will be Covered?. Change in Budget Line Consumer’s Equilibrium Price Effect Giffen Good Paradox Applications of the Indifference Curve Approach. A Change in the Money Income. Y. Tell Me the Change When. I. 0. X.

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The Indifference Curve Approach

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  1. The Indifference Curve Approach S.6 Econ. M. Kwong

  2. What will be Covered? • Change in Budget Line • Consumer’s Equilibrium • Price Effect • Giffen Good Paradox • Applications of the Indifference Curve Approach

  3. A Change in the Money Income. Y Tell Me the Change When... I 0 X

  4. A Change in the Relative Price. Y Tell Me the Change When... Px 0 X

  5. Consumer's Equilibrium Y Which Point Is the Equilibrium? C E E D 0 X

  6. Consumer's Equilibrium The Tangency Point Between the Budget Line and the Indifference Curve of the Highest Attainable Utility Level Y E 0 X

  7. Price Effect Y • A Different Level of Utility • Consumes on a New Budget Line • S.E. + I.E. Px Decreases 0 X

  8. Substitution Effect Y • A Change in Consumption After a Change in Relative Price of Two Goods • Consumes on a Hypothetical Budget Line • No Change in the Utility Level Px Decreases 0 X

  9. Income Effect Y • An Inferior Good • Consumes on a New Budget Line • Consumes Less X • An Increase in the Utility Level Px Decreases 0 X

  10. Income Effect Y • A Normal/ Superior Good • Consumes on a New Budget Line • Consumes More X • An Increase in the Utility Level Px Decreases 0 X

  11. Still Remember the Law of Demand? Now the law is under ATTACK!

  12. The Giffen Good Paradox So What? Px/Py Of An Inferior Good Will Consume More X

  13. Px/Py There Is A Theoretical Or Logical Possibility to Refuse The Law We Will Have An Upward- Sloping Demand Curve 0 X

  14. The Law of Demand • Therefore the Law of Demand Is Asserted • The Law Has Not Been Rejected • Theory by Its Hypothetical Nature Cannot Reject Another Theory • Only Empirical Facts Can Reject a Theory • As There Is No Observations of Giffen Good Cases, The Law Is Confirmed

  15. Are They SUBSTITUTES Or COMPLEEMNTS? Complements Left Shoes Which IC Can Correctly Show Their Relationship? Right Shoes

  16. What Is the Result of a S.E.? Complements No Substitution Effect Left Shoes Right Shoes

  17. Are They SUBSTITUTES Or COMPLEEMNTS? Substitutes Tea Tea Which IC Can Correctly Show Their Relationship? Coffee

  18. Substitutes What Happens If The MRSc < MRSe? Tea Budget Line Tea We only consume Tea! Coffee

  19. A Subsidy Y Take Home Cash! 0 X

  20. How Much Would You Consume In a Regular Restaurant? Money Income How Much Would You Consume In a Buffet Dinner ? Lump Sum Payment 0 Food

  21. Children Are Less Preferred Today! You Have Less Children! Money Income Money Income Has Been Increasing 0 Children

  22. The End Hope You Have Enjoyed It

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