ECON 2030 Study Guide - Midterm Guide: Indifference Curve, Budget Constraint, Demand Curve

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26 May 2014
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As seen in the above figure, points a and c are on the same indifference curve and are therefore equally preferred. Points b and c are also on the same indifference curve and are therefore equally preferred. Transitivity implies that the consumer would be indifferent between a and b; however, since more is preferred to less, a is preferred to b. This describes the slope of the indifference curve. The slope of the budget line represents the rate at which the consumer must trade one good for another at any given bundle: an increase in a consumer"s income will increase the marginal rate of transformation. An upward sloping price-consumption curve indicates that as the price of the good falls, more of both goods will be purchased. So the demand curve for the good measured on the horizontal axis slopes downward: an increase in income (all else equal) will always lead to a parallel shift of the budget line.

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