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! Edge Worth, Preto and Hicks
! Utility is quality but not quantity
! Ranking of goods is possible on the basis of
preferences
! A consumer is in equilibrium when he prefers
that good which gives him maximum
satisfaction and it also can be purchased with
in given budget.
 
   

! ¯ t is a curve which shows the different

combinations of two goods X and Y, having
equal satisfaction to the consumer´


 
 
 


A 1 10 Same

B 2 6 Same

C 3 3 Same

D 4 1 Same
›
  
 
  
  
1. ndifference Curve is negatively sloped
extra units of X-good reduce some units of
Y-good.
slope of C-curve = MUx/MUy
2. ndifference Curve is convex to the origin
Marginal rate of substitution between two goods
is declined
MRSxy = MUx/MUy = Slope of .C
! ¯MRS is the rate at which a consumer
substitutes the two goods and this rate is
always decreasing.
! This is called law of declining marginal rate
of substitution
3. ndifference Curve can not intersect each
other
Satisfaction at E = Satisfaction at B
Satisfaction at E = Satisfaction at C
Satisfaction at C = Satisfaction at B
4.Higher ndifference Curve shows the higher
satisfaction
As ndifference Curve is away from the origin it
will show higher utility due to higher
quantities of X and Y goods.
P
  P 
! Constraint for a consumer to keep himself in
a limit regarding expenditures.
! A line which shows different combinations of
two goods, which can be purchased with in
given budget
B=Pxqx + Pyqy
Slope of B.L = rise/run = B/Py
B/Px
 9


P 


9
9
       9
  
! Slope of B.L = Px/Py
! When the price of some commodity
decreases then the budget line extends
regarding that commodity
! f the price of both goods are changed or
overall budget increases then budget line
shifts regarding both goods.
 9


 !




P

ric £
 P

ric £
P

ric £



!

9
9
       9



(  


! Slope of .C = slope of B.L
! MRSx,y = Px/Py
t is that point where ndifference Curve makes
tangency with budget line.