7.2 Indifference curves and budget lines

Question 1

What is the meaning of an indifference curve?

Answer 1

This is when the consumer gains equal satisfaction from the consumption of certain combinations of goods or services and prefers neither combination to the other.
It is often a convex curve. Looks like the lower left part of a circle

Question 2

What is the meaning of a budget line?

Answer 2

It is a financial restraint on consumers. This is where their income or limited resources allows them to buy a specific number of goods.
Straight line from top left to bottom right

Question 3

What causes a shift in the budget line?

Answer 3

It can shift by changes in the price of goods, changes in the consumers income and also changes in the consumers preference.

Question 4

Income effect on normal and inferior goods

Answer 4

Price decrease → increase in real income
*Increase the quantity demanded of normal goods
*Decrease quantity demanded of inferior goods

Price increase → decrease in real income
*Decrease quantity demanded of normal goods
*Increase quantity demanded of inferior goods

Question 5

substitution effect

Answer 5

Price decrease → Quantity demanded increases
* Consumers forego consumption of now relatively more
expensive substitutes

Price increase → Quantity demanded decreases
* Consumers switch to substitutes that are now relatively less
expensive

Question 6

What is a giffen good?

Answer 6

people consume more as the price rises

Question 7

what are the limitations of indifference curves?

Answer 7

Assumption of rationality: Indifference curves assume that consumers are rational and always seek to maximize their utility.
Continuous preferences: Indifference curves assume that consumer preferences are continuous, meaning that consumers can precisely rank their preferences for every possible combination of goods.
There are multiple products to choose from not just 2