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Chapter 8 - PowerPoint Slides

Chapter 8 discusses the theory of demand using the indifference approach, focusing on concepts such as indifference curves, budget lines, and consumer equilibrium. It explains how changes in income or prices affect consumer choices and distinguishes between income and substitution effects. Key terms include utility, marginal rate of substitution, and various curves related to consumer behavior.

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59 views16 pages

Chapter 8 - PowerPoint Slides

Chapter 8 discusses the theory of demand using the indifference approach, focusing on concepts such as indifference curves, budget lines, and consumer equilibrium. It explains how changes in income or prices affect consumer choices and distinguishes between income and substitution effects. Key terms include utility, marginal rate of substitution, and various curves related to consumer behavior.

Uploaded by

monamap117
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

© VAN SCHAIK PUBLISHERS

Chapter 8:
The theory of
demand: the
indifference
approach
Learning outcomes

Once you have studied this chapter you should be able to


• explain what indifference curves are
• define the budget line and explain consumer equilibrium
• explain the impact of changes in income or prices
• distinguish graphically between the income and substitution
effects of a price change

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Ordinal and cardinal utility

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Indifference curves

• Three basic assumptions

• Definition

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Indifference curves

• An example

Table 8-1 Combinations of meat and bread that yield the same level
of satisfaction to Koos van der Merwe (Textbook page 134)

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Indifference curves
An example

Figure 8-1 An indifference curve (Textbook page 135)

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Indifference curves

• Properties of indifference curves


Box 8-1 Two extreme cases (Textbook page 136)
Table 8-2 Two further sets of combinations of bread and meat that
yield equal satisfaction to Koos (Textbook page 136)

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Indifference curves
Properties of indifference curves

Figure 8-2 An indifference map (Textbook page 137)

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Indifference curves
Properties of indifference curves

Figure 8-3 Indifference curves cannot intersect (Textbook page 137)

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The budget line
Table 8-3 Affordable combinations of bread and meat
(Textbook page 137)

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The budget line

Figure 8-4 The budget line (Textbook page 138)

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Consumer equilibrium
• Equilibrium in our example
Figure 8-5 Consumer
equilibrium (Textbook
page 138)

• The consumer’s
valuation and the
market valuation
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Changes in equilibrium
• A change in income
Figure 8-6 The effect of an increase in income (Textbook page 140)

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Changes in equilibrium

• A change in price

Figure 8-7 The impact of a price change and the derivation of a


demand curve (Textbook page 140)

• The demand curve

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Changes in equilibrium

• Income and substitution effects of a price change


Figure 8-8 The income and substitution effects of a price change
(Textbook page 141)

• Further applications of the indifference curve


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Important concepts
• Utility
• Cardinal utility
• Ordinal utility
• Indifference curve
• Indifference map
• Law of substitution
• Marginal rate of substitution
• Budget line
• Equilibrium
• Income-consumption curve
• Price-consumption curve
• Income effect
• Substitution effect
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