2.5.ppt-MARGINAL RATE OF SUBSTITUTION in Micro Economics

2.5.ppt-MARGINAL RATE OF SUBSTITUTION in Micro Economics

1. BUSINESS ECONOMICS
107
UNIT- 2
Faculty Name: Dr. Shuchi Singhal
Designation: Associate Professor
School/Dept: Management
Email address of Faculty Member: [email protected]

2. Programme Outcomes
2
PO1: Apply knowledge of various functional areas of business
PO2: Develop communication and professional presentation skills
PO3: Demonstrate critical thinking and Analytical skills for business
decision making
PO4: Illustrate leadership abilities to make effective and productive
teams
PO5: Explore the implications and understanding of the process of
starting a new venture
PO6: Imbibe responsible citizenship towards a sustainable society
and ecological environment
PO7: Appreciate inclusivity towards diverse cultures and imbibe
universal values
PO8: Foster Creative thinking to find innovative solutions for
various business situations

3. Course Objective and Course Outcomes
3
CO1:Understand the fundamental concepts of Business
Economics.
CO2:Analyze the relationship between consumer behaviour
and demand.
CO3:Explore the theory of production through the use of
ISO-QUANTS.
CO4:Understand the concept and relevance of short-term
and long-term cost.
CO5:Examine pricing decisions under various market
conditions.
CO6:Analyse economic challenges posed to businesses

4. Syllabus

5. Consumer Behavior and Demand
Analysis
2.1 CARDINAL UTILITY APPROACH: DIMINISHING MARGINAL UTILITY
2.2 CARDINAL UTILITY APPROACH: LAW OF EQUI- MARGINAL UTILITY
2.3 ORDINAL UTILITY APPROACH: INDIFFERENCE CURVES-Part 1
2.4 ORDINAL UTILITY APPROACH: INDIFFERENCE CURVES-Part 2
2.5 MARGINAL RATE OF SUBSTITUTION
2.6 BUDGET LINE AND CONSUMER EQUILIBRIUM
2.7 THEORY OF DEMAND
2.8 LAW OF DEMAND
2.9 MOVEMENT ALONG VS. SHIFT IN DEMAND CURVE
2.10 CONCEPT OF MEASUREMENT OF ELASTICITY OF DEMAND
2.11 FACTORS AFFECTING ELASTICITY OF DEMAND
2.12 INCOME ELASTICITY OF DEMAND, CROSS ELASTICITY OF DEMAND,
ADVERTISING ELASTICITY OF DEMAND
2.13 DEMAND FORECASTING: NEED, OBJECTIVE AND METHODS IN BRIEF
By: Shuchi Goel 5

6. 2.5
•Budget Line and
Consumer Equilibrium
•Change in Price and
Shift in Budget Line
•Change in Income and
Shift in Budget Line
•Price Effect
•Income Effect
•Substitution Effect
6

7. 2.5 BUDGET LINE
AND CONSUMER
EQUILIBRIUM
By: Shuchi Goel 7

8. Suggested Readings
Author: Robert S. Pindyck & Daniel L Rubinfeld
Title of the Book: Microeconomics
Chapter’s Name: Individual and Market Demand
Author: Christopher R. Thomas & S. Charles Maurice
Title of the Book: Economics
Chapter’s Name: Theory of Consumer Behaviour

Author: Paul A. Samuelson & William D. Nordhaus
Title of the Book: Economics
Chapter’s Name: Demand and Consumer Behaviour
https://
www.yourarticlelibrary.com/economics/consumers-equilibrium-assumptions-and-conditions-economics/1
0785

By: Shuchi Goel 8

9. 2.5 BUDGET LINE AND CONSUMER EQUILIBRIUM
Budget Line and Consumer Equilibrium
•The income constraint, in the case of two commodities, may be written
Y = P
x
q
x
+ P
y
q
y
------(1)
By: Shuchi Goel 9

10. •The income constraint is represented graphically by the budget line, whose
equation is derived from eq. (1), by solving for q
y:
q
y
= 1 Y – P
x
q
x
-----(2)
P
y P
y
By: Shuchi Goel 10

11. Figure 1: Budget Line
By: Shuchi Goel 11
Y/P
y
Y/ P
x
A
B
O
X
Y
Good X
Good Y

12. Consumer Equilibrium
•Two conditions must be fulfilled for the consumer to be in equilibrium:
1.The first condition is that the marginal rate of substitution be equal to the ratio of
prices of the two commodities.
By: Shuchi Goel 12

13. 2.\\\\The second condition is that the indifference curves be convex to the
origin at the point of equlibrium.
By: Shuchi Goel 13

14. Graphical Presentation of the Equilibrium of the Consumer:
•Given the indifference map of the consumer and his budget line, the
equilibrium is defined by the point of tangency of the budget line with the
highest possible indifference curve.
•The consumer is in equilibrium at point ‘e’ in figure 2.
•At the point of tangency, the slope of the budget line (P
x / P
y) and of the
indifference curve (MRS
x,y = MU
x / MU
y) are equal:
MU
x = P
x
MU
y = P
y
By: Shuchi Goel 14

15. •The first condition is denoted graphically by the point of tangency of the budget line
and IC.
•The second condition is implied by the convex shape (Cont..)
By: Shuchi Goel 15
Figure 2: Consumer’s Equilibrium

16. of the indifference curves.
•The consumer maximises his utility by buying x* and y* if the two commodities.
By: Shuchi Goel 16

17. Change in Price and Shift in Budget Line:
By: Shuchi Goel 17
Figure 1: Changes in Budget
Line as a Result of Changes in
Price of Good X
Figure 2: Changes in Budget
Line as a Result of Changes in
Price of Good Y

18. By: Shuchi Goel 18
Figure 3: Shifts in Budget Line as a Result of Changes in Income

19. Figure 4: Price Consumption Curve
By: Shuchi Goel 19

20. By: Shuchi Goel 20
Figure 5: Income Consumption Curve: Income Effect

21. By: Shuchi Goel 21
Figure 6: Income Consumption Curve in Case of Good X being Inferior Good

22. Figure 7: Income Consumption Curve in case of Good Y being Inferior Good
By: Shuchi Goel 22

23. Figure 8: Substitution Effect
By: Shuchi Goel 23

24. By: Shuchi Goel 24
Figure 4: Price Effect Split up into Substitution and Income Effects for
Normal Good

25. By: Shuchi Goel 25
Figure 5: Price Effect Split up into Substitution and Income Effects for Inferior
Good

26. By: Shuchi Goel 26
Figure 6: Price Effect Split up into Substitution and Income Effects for Giffen Good

27. Conclusion
•The consumer has a given income which sets limits to his maximising behaviour.
Income acts as a constraint in the attempt for maximising utility.
•The income constraint is represented graphically by the budget line
•The consumer is in equilibrium when he maximises his utility, given his income
and the market prices.
By: Shuchi Goel 27