➢ Law of diminishing marginal utility
➢ Law of equi marginal utility
➢ Indifference curve/Budget line
These topics are basically related with consumer equilibrium that is
how consumer splits his expenditure on different products to
maximize his total satisfaction. Indifference curve combined with
budget line also explain the same idea. Whenever, there is question
how consumer can get equilibrium that is, maximize his total
satisfaction, it will be up to you whether you use utility concept or
indifference curve. But if there is question specifically on consumer
equilibrium with reference to indifference curve, then use the
indifference curve to explain your answer.
NOTE: We will discuss indifference curve and questions on it later.
==========================================================
J2010/P4/Q5: Economic theory emphasizes the idea of an equilibrium
position. Discuss whether the idea of equilibrium is as useful and
practical way of explaining the behavior of a consumer. (25)
Steps should be followed
➢ Define utility that is utility means satisfaction gained by
consumer from consumption of product.
➢ Explain different types of utility that is,
• Total utility (TU): Satisfaction from the consumption of all
the units of product.
• Marginal utility (MU): Satisfaction from one extra unit of
product.
MU= change in total utility ÷ total units of product consumed
• Average utility (AU) : Per unit utility that is
AU = total utility / total units consumed.
➢ Then define the law of diminishing marginal utility (LDMU): This
law says that whenever there is an increase in consumption,
marginal utility will fall OR when there is an increase in
consumption, total utility will rise at diminishing rate and after
certain point it will fall.
➢ Construct table to show that marginal utility will fall when there
is an increase in consumption.
Units of cup
of tea
1
2
3
4
5
6
Total
utility
10
18
24
27
27
25
Marginal
Utility
10
8
6
3
0
-2
Note: Construction of table can be avoided.
➢ Construct diagram showing that marginal utility falls and total
utility rises at diminishing rate and after certain point it falls
The above diagram is showing that when there is an increase in
consumption of product, marginal utility falls and after certain point it
becomes negative due to disutility that is, consumption affects the
consumer negatively .Total utility curve is rising at diminishing rate
and after certain point it falls due to disutility.
➢ Then explain that the above discussion on utility can be
extended to explain consumer behaviour when consumer wants
to spend on different products to maximize his total satisfaction.
➢ Explain law of equi-marginal utility(LEMU):This law says that if
consumer spends on more than one product, his total utility
from the consumption will be maximum if
MUA/PriceA = MUB/PriceB = MUC/PriceC……….MUN/PN
The above equation states that the consumer equilibrium is where
the marginal utility from the last dollar spent on product “A” equals
the utility from the last dollar spent on product “B” equals the utility
from last dollar spent on product C equals the utility from last dollar
spent on product N, thus taking into account all of the products.
➢ In other words, equi-marginal utility principle says that
consumer will be in equilibrium when it is not possible to switch
a single dollar’s worth of expenditure from one product to
another and obtain an increase in total utility.
➢ Equi-marginal utility principle assumes that utility can be
measured, consumer has limited income, consumer’s taste is
constant, consumer is rational and consumer seeks to maximise
total utility.
➢ Then explains the law of equi – marginal utility by considering
only two products A and B. (Note: there is no need construct
table given in notes).
➢ Suppose that consumer is consuming two products A and B with
price of $10 and $5 respectively. Moreover, he consumes 8 units
of product A and 4 units of product B. From 8th unit of product A
his satisfaction is 100 and from 4th unit of product B his utility is
50. Therefore, consumer total satisfaction from product A and
product B will be maximum if
MUA/priceA = MUB/PriceB
By putting the above figures in the formula
100/$10 = 50/$5
10 = 10
The above calculation is showing that per dollar satisfaction from
each product is same that is 10, therefore, consumer total satisfaction
will be maximum from 8 units of product A and 4 units of product B.
➢ Now suppose that there is fall in price of product B, then
MUB/priceB > MUA/PriceA
➢ It means that per dollar satisfaction from product B will be
greater than product A.
➢ In this situation, consumer will change the combinations of two
products. He will purchase more units of product B and less unit
of product A until per dollar satisfaction from each product
becomes same that is,
MUA/PriceA = MUB/PriceB
So, by the use of utility it has been possible to demonstrate the
logic of “rational” consumer choice and the derivation of
demand curve, however it does present a few major difficulties
particularly when it comes to the practical aspect of explaining
consumer equilibrium.
➢ Then explain the limitation of utility concept.
• It is assumed that consumer can exactly know the utility
that he derives and can equate per dollar satisfaction from
each product. But in reality it could be difficult for
consumer to measure the utility he derives from different
products. Therefore, in many cases consumer may not be
able to satisfy the law of equi-marginal utility requirement.
➢ It is assumed that consumer will behave rationally but in many
cases may be consumer is not behaving rationally and there
could be impulse buying or may be consumer is influenced by
advertisement.
➢ Consumer may not be able to maximize his total utility due to
lack of full information about the product.
➢ The utility theory assumes that when there is change in price of
product, consumer will change the combinations of product he is
purchasing but this can not be applied on durable products
because consumers can not change durable products time and
time again.
NOTE: Almost all the other questions on utility concept have the same
answer. I am going to discuss few other questions, 90% answer will
be same as discussed above.
==========================================================
J06/p4/Q3a: Question is when poor gets one extra dollar, his
satisfaction will be more than when rich gets one extra dollar.
Steps should be followed
Utility is the satisfaction that people derive from the consumption of
goods and services. Total utility (TU) and Marginal utility (MU) are
two important measures of utility. Total utility is the total satisfaction
a consumer obtains from the consumption of all the units of a good
consumed.
While Marginal utility is the satisfaction a consumer obtains from the
consumption of one extra unit of a good within a given time period
OR marginal utility can also be defined as the utility from the last unit
of product OR change in total utility when one extra unit of product is
consumed is known as marginal utility.
That is,
MU= change in TU ÷ change in units of good consumed.
Average utility means per unit utility that is,
AU = TU/Total units of product consumed
According to law of diminishing marginal utility, as more and more
units of products are consumed successfully an extra unit will provide
less additional satisfaction than the previous unit OR it can be said
that according to law of diminishing marginal utility, Marginal utility
will fall when there is an increase in the consumption of product. Law
of diminishing marginal utility is based on the following assumptions.
1.
2.
3.
4.
Consumer should be rational.
The product is taken in suitable and reasonable units.
There should be no interval between two consumptions.
The taste, fashion, customs and habits of the consumer remain
unchanged.
5. Utility can be measured.
The LDMU can be further explained with the help of following table.
Number
of cups of
Tea
1
2
3
4
5
6
7
8
Total
utility
Marginal
utility
80
150
210
250
275
280
280
278
80
70
60
40
25
5
0
-2
The above table is showing that when there is an increase in
consumption of number of cups of tea, marginal utility is falling. The
second cup of tea is giving less additional satisfaction than the first
cup. The third cup is giving even less satisfaction. Total utility is
increasing but at diminishing rate and after certain point it falls.
➢ When poor gets one extra dollar and spends it, his marginal
utility falls but still marginal utility from one extra dollar will be
greater than the marginal utility gained by rich person when he
gets and spends one extra dollar.
➢ But discussion can be made that whether utility laws can be
applied on money or not because some says that more money
means more power, respect and influence in the society.
Therefore laws of utility can not be applied on money.
➢ But other says that utility laws can be applied on money.
➢ If we accept the second opinion, then laws of utility can be
applied on money. In this case government should take some
measures to increase the money possessed by poor and reduce
the money possessed by rich.
➢ The measure could be progressive tax system that transfers
money from rich to poor.
➢ But when poor receives one extra dollar ,its total utility will rise
and when government takes one extra dollar from rich, its total
utility will fall. Then how much there will be overall increase in
welfare (utility) of people will be uncertain.
==================================================
J11/p4/Q3b: Analyse what is meant by the equi-marginal principle of
consumer demand and whether it can be linked to the derivation of a
market demand curve. (13)
N11/P4/Q2: Explain the link between a consumer’s and the equimarginal principle of utility.(12)
J12/P4/Q2a: Explain the theoretical link between utility, price and
demand curve for product. (12)
N/2013/Q2a: Use the theory of marginal utility to analyse how a
consumer will normally buy more of a product at a lower price than at
a higher price and explain how this theory can be used to derive a
market demand curve. (12)
N/16/P4/Q3a: A number of consumers are deciding whether to buy a
product. How far does economic theory explain the determination of
the market demand curve for that product? (12)
J2019/P4/Q4a: Analyse how an individual consumer’s demand curve
for a product is derived and consider how this may be linked to its
market. (12)
NOTE: Answers are same for all these questions.
Steps should be followed
➢ The theory of consumer behavior explains consumer equilibrium
with the help of equi-marginal principle.
➢ Define utility and explain different types of utility that is,
➢ Satisfaction from the consumption of product is known as utility.
• Total utility (TU): Satisfaction from the consumption of all
the units of product.
• Marginal utility (MU): Satisfaction from one extra unit of
product.
MU= change in total utility ÷ total units consumed.
• Average utility (AU) : Per unit utility that is
AU = total utility ÷ total units consumed.
➢ Then define the law of diminishing marginal utility (LDMU): This
law says that whenever there is an increase in consumption,
marginal utility will fall OR when there is an increase in
consumption ,total utility will rise at diminishing rate and after
certain point it will fall.
➢ Construct diagram showing that marginal utility falls and total
utility rises at diminishing rate and after certain point it falls
The above diagram is showing that when there is an increase in
consumption of product, marginal utility falls and after certain point it
becomes negative due to disutility that is, consumption affects the
consumer negatively .Total utility curve is rising at diminishing rate
and after certain point it falls due to disutility.
➢ Then explain that the above discussion on utility can be
extended to explain consumer behaviour when consumer wants
to spend on different products to maximize his total satisfaction.
➢ Explain principle of equi-marginal utility: The equi-marginal
utility principle says that if consumer spends on more than one
product, his total utility from the consumption of Product A, B
,C…..N will be maximum if
MUA/PriceA = MUB/PriceB = MUC/PriceC……….MUN/PN
➢ The above equation states that the consumer equilibrium is
where the marginal utility from the last dollar spent on product
“A” equals the utility from the last dollar spent on product “B”
equals the utility from last dollar spent on product N, thus taking
into account all of the products. In other words, equi-marginal
utility principle says that consumer will be in equilibrium when it
is not possible to switch a single dollar’s worth of expenditure
from one product to another and obtain an increase in total
utility.
➢ Equi-marginal utility principle assumes that utility can be
measured, consumer has limited income, consumer’s taste is
constant, consumer is rational and consumer seeks to maximise
total utility.
➢ Then explains the law of equi – marginal utility by considering
only two products A and B. (Note: there is no need construct
table given in notes).
➢ Suppose that consumer is consuming two products A and B with
price of $10 and $5 respectively. Moreover, he consumes 8 units
of product A and 4 units of product B. From 8th unit of product A
his satisfaction is 100 and from 4th unit of product B his utility is
50. Therefore, consumer total satisfaction from product A and
product B will be maximum if
MUA/priceA = MUB/PriceB
By putting the above figures in the formula
100/$10 = 50/$5
10 = 10
The above calculation is showing that per dollar satisfaction from
each product is same that is 10, therefore, consumer total satisfaction
will be maximum from 8 units of product A and 4 units of product B.
➢ Now suppose that there is fall in price of product B, then
MUB/priceB > MUA/PriceA
➢ It means that per dollar satisfaction from product B will be
greater than product A.
Keeping in mind the per dollar utility concept it can be said that
demand curve for product B will slope downward showing that when
there is decrease in price of product B, its quantity demanded will
increase due to increase in per dollar utility. Thus it is possible to
develop theoretical link between utility, price and demand of product.
The above diagram is showing that when there is decrease in price of
Product “B”, its quantity demanded increases from D1 to D2. This is
because when there is decrease in price of product “B”, per dollar
utility from product B increases, therefore consumer increases the
purchase of product B.
➢ All the consumers will behave in the same way, therefore for all
the consumers demand curves slopes downward.
In the above diagram, we are assuming that market consists of two
consumers Mr. 1 and Mr.2 demanding product X. Both individual
demand curves slope downward showing inverse relationship
between price and quantity demanded. In order to find the market
demand curve, we add up individuals demand at given prices through
horizontal summation.
Conclusion of all questions: So, by use of utility it is possible to
demonstrate the logic of “rational” consumer choice and derive the
demand curve of an individual consumer. The market demand curve is
derived simply by aggregation of individuals’ demand curves.
=========================================================
N12/P4/Q2a: A study found that demand for tickets for exhibitions at
a major art gallery had unitary price elasticity. Explain how the
concept of diminishing marginal utility may be used to construct a
demand curve for the product and whether that analysis still applies
in case of demand for tickets for the exhibitions. (12)
J/13/p4/Q5a: Explain how a consumer allocates expenditure
according to the principle of equi-marginal utility and analyse how a
change in income might affect that allocation. (13)
➢ Utility is the satisfaction that people derive from the
consumption of goods and services. Total utility (TU) and
Marginal utility (MU) are two important measures of utility.
Total utility is the total satisfaction a consumer obtains from the
consumption of all the units of a good consumed. While
Marginal utility is the satisfaction a consumer obtains from the
consumption of one extra unit of a good within a given time
period OR marginal utility can also be defined as the utility from
the last unit of product OR change in total utility when one extra
unit of product is consumed is known as marginal utility.
➢ According to law of diminishing marginal utility, as more and
more units of products are consumed successfully an extra unit
will provide less additional satisfaction than the previous unit
OR it can be said that according to law of diminishing marginal
utility, Marginal utility will fall when there is an increase in the
consumption of product.
The TU and MU can be explained with the help of the following
diagram.
In the above diagram MU curve slopes downward, simply illustrating
the principle of diminishing marginal utility.The TU curve starts at the
origion. When MU is positive and diminishing, TU increases at a
decreasing rate. TU reaches a peak when MU is zero. TU is falling
when Mu becomes negative(Disutility).
➢ We can extend our analysis of utility to explain how a rational
consumer decides what combination of goods to buy from the
given income. The underlying principle is called equi-marginal
utility.
➢ Explain principle of equi-marginal utility: It says that if
consumer spends on more than one product, his total utility
from the consumption will be maximum if
MUA/PriceA = MUB/PriceB = MUC/PriceC……….MUN/PN
The above equation states that the consumer equilibrium is where
the marginal utility from the last dollar spent on product “A” equals
the utility from the last dollar spent on product “B” equals the utility
from last dollar spent on product N, thus taking into account all of the
products.
➢ In other words, equi-marginal utility principle says that
consumer will be in equilibrium when it is not possible to switch
a single dollar’s worth of expenditure from one product to
another and obtain an increase in total utility.
➢ Equi-marginal utility principle assumes that utility can be
measured, consumer has limited income, consumer’s taste is
constant, consumer is rational and consumer seeks to maximise
total utility. The analysis is based on the following assumptions:
1. Satisfaction can be measured.
2. Consumer is rational and therefore wants to maximize total
satisfaction.
3. Taste and preferences are constant.
➢ To further explain the theory we can develop the following
example. Suppose that consumer has a fixed income of $16 per
time period and he spends $16 on normal goods A and B.
Product A costing $2 each and product B costing $4 each. We
further assume that there is no saving and borrowing that is
consumer has to spend $16 on these two products.
The table below will help to explain consumer equilibrium.
Units MUA
MUB
Price$2 Price
each
$4
each
MUA/PriceA MUB/PriceB
1
80
68
40
17
2
52
32
26
8
3
20
28
10
7
4
16
24
8
6
5
8
20
4
5
Given this situation, it can be seen that the consumer is in equilibrium
when he consumes four units of product A and two units of product B
with given income of $16 that is,
MUA/PriceA = MUB/PriceB
So,
MUA from 4th unit = MUB from 2nd unit
Price of A
Price of B
16/$2 = 32/$4
So total utility from 4 units of A and 2 units of B will be
168 + 100 = 268
Therefore, with given income of $16, it will not be possible for
consumer to get other combination of these two products to obtain
the higher level of total utility.
It is also possible to use marginal utility as a means of deriving a
demand curve. If for instance, price of product is going to fall to $2,
then per dollar utility from B will be higher than per dollar utility from
product A, that is in this case
16/$2 ≠ 32/$2
8
≠
16
In this new situation per dollar utility from product A is 8 and per
dollar utility from product B is 16. To attain equilibrium again,
consumer will increase the consumption of product B and decrease
the consumption of product A till the point where
MUA/PriceA = MUB/PriceB
To satisfy the above formula consumer will increase the consumption
of product B from 2 units to 5units and decrease the consumption of
product A from 4 units to 3 units. That is
MUA from 3rd unit = MUB from 5th unit
Price of product A
Price of product B
20/$2
10
=
=
20/$2
10
We can use this example to construct the consumer’s demand curve
for product B as given below.
A decrease in price of product B has resulted an increase in quantity
demanded of product B because with the given income and new price
of product B consumers maximizes satisfaction at a higher quantity of
product B. In other words decrease in price of product B will lead to
increase in per dollar satisfaction from product B. Therefore,
consumer will increase the consumption of product B. Thus it is
possible to develop theoretical link between utility, price and demand
of product.
(NOTE: For question N12/P4/Q2a answer will end here with the
conclusion that unitary elastic demand implies that the demand curve
is sloping downward from left to right showing that fall in price causes
rise in quantity demanded with the same proportion and vice versa.
Therefore demand curve reflects diminishing marginal utility. Thus the
analysis of consumer equilibrium and derivation of demand curve will
apply to the demand for tickets of exhibition as much as to any other
product with the normal downward sloping demand curve).
If this is what each consumer does, it is also what all consumers taken
together do. Thus the theory of consumer behavior predicts a
negatively sloped market demand curve.
The market demand curve is the horizontal sum of the quantities
demanded by all individual buyers at various prices per period of
time. So market demand curve represents the aggregation of demand
curves of all individual buyers.
➢ So far, we have analyzed that a change in price of a good brings
a movement along the demand curve assuming money income
remains unchanged. Thus each demand curve is drawn for a
particular level of income; therefore a change in income must
lead to shift in the demand curve, itself. Rightward or leftward
shift due to change in income depends on whether product is
inferior good or normal good.
If there is an increase in income, demand curve for normal good will
shift rightward showing increase in demand but for inferior good,
demand curve will shift leftward showing decrease in demand. This
can be explained with the help of following diagrams.
In the figure on the left a rise in consumer income causes rightward
shift in demand curve for normal good from D to D1. Increase in
demand leads to shortage of product at price “P” from e to b.Due to
this shortage price will increase from P to P1 causing upward
movement in supply curve from e to e1 and it also causes upward
movement in new demand curve D1 from b to e1. In this way new
equilibrium will be attained at new price P1 and equilibrium quantity
will be q1.Movement along the demand curve refers to a
readjustment by consumer in order to restore MU/P ratio.
In the same way a rise in consumer income will cause leftward shift in
demand curve for inferior good from D to D1.This will create surplus
at original price P from e to b. Surplus will lead to fall in price from P
to P1. Due to fall in price there will be downward movement along
the supply curve from e to e1 and demand curve from b to e1.
Therefore new equilibrium price will be P1 and new equilibrium
quantity will be q.
==========================================================
N2019/P4/Q3a: Explain what is meant by a normal good and
comments on the link between total utility, marginal utility and a
consumer’s demand curve for that good. (12)
Steps should be followed
➢ Demand is the quantity of product that consumer is willing at
able to purchase at various prices over certain time period, other
things remain constant. Therefore, effective demand will be
there when there is willingness and ability to purchase the
product. Ability means purchasing power. There are many
factors that can influence the purchasing power of consumer.
Income is also one factor that can influence the purchasing
power of consumer. Normal good are those good for which
demand increases when there is an increase in income and vice
versa. Such good is said to have a positive income effect as there
exists a direct relationship between consumer’s income and
demand for that good.
➢ The theory of consumer behavior explains consumer equilibrium
with the help of equi-marginal principle.
➢ Define utility and explain different types of utility that is,
➢ Satisfaction from the consumption of product is known as utility.
• Total utility (TU): Satisfaction from the consumption of all
the units of product.
• Marginal utility (MU): Satisfaction from one extra unit of
product.
MU= change in total utility ÷ total units consumed.
• Average utility (AU) : Per unit utility that is
AU = total utility ÷ total units consumed.
➢ Then define the law of diminishing marginal utility (LDMU): This
law says that whenever there is an increase in consumption,
marginal utility will fall OR when there is an increase in
consumption ,total utility will rise at diminishing rate and after
certain point it will fall.
➢ Construct diagram showing that marginal utility falls and total
utility rises at diminishing rate and after certain point it falls.
The above diagram is showing that when there is an increase in
consumption of product, marginal utility falls and after certain point it
becomes negative due to disutility that is, consumption affects the
consumer negatively .Total utility curve is rising at diminishing rate
and after certain point it falls due to disutility.
➢ Then explain that the above discussion on utility can be
extended to explain consumer behaviour when consumer wants
to spend on different products to maximize his total satisfaction.
➢ Explain principle of equi-marginal utility: It says that if consumer
spends on more than one product, his total utility from the
consumption will be maximum if
MUA/PriceA = MUB/PriceB = MUC/PriceC……….MUN/PN
The above equation states that the consumer equilibrium is where
the marginal utility from the last dollar spent on product “A” equals
the utility from the last dollar spent on product “B” equals the utility
from last dollar spent on product N, thus taking into account all of the
products.
➢ In other words, equi-marginal utility principle says that
consumer will be in equilibrium when it is not possible to switch
a single dollar’s worth of expenditure from one product to
another and obtain an increase in total utility.
➢ Equi-marginal utility principle assumes that utility can be
measured, consumer has limited income, consumer’s taste is
constant, consumer is rational and consumer seeks to maximise
total utility.
➢ Suppose that consumer is consuming two products A and B with
price of $10 and $5 respectively. Moreover, he consumes 8 units
of product A and 4 units of product B. From 8th unit of product A
his satisfaction is 100 and from 4th unit of product B his utility is
50. Therefore, consumer total satisfaction from product A and
product B will be maximum if
MUA/priceA = MUB/PriceB
By putting the above figures in the formula
100/$10 = 50/$5
10 = 10
The above calculation is showing that per dollar satisfaction from
each product is same that is 10, therefore, consumer total satisfaction
will be maximum from 8 units of product A and 4 units of product B.
➢ Now suppose that there is fall in price of product B, then
MUB/priceB > MUA/PriceA
➢ It means that per dollar satisfaction from product B will be
greater than product A.
Keeping in mind the per dollar utility concept it can be said that
demand curve for product B will slope downward showing that when
there is decrease in price of product B, its quantity demanded will
increase due to increase in per dollar utility. Thus it is possible to
develop theoretical link between utility, price and demand of product.
The above diagram is showing that when there is decrease in price of
Product “B”, its quantity demanded increases from D1 to D2. This is
because when there is decrease in price of product “B”, per dollar
utility from product B increases, therefore consumer increases the
purchase of product B.
======================================================
J/11/p4/Q3a: Question is discuss whether demand schedules and
budget line diagrams are similar in the way they represent the effect
of
i. A rise in the price of product
ii. A rise in a consumer’s income.
Steps should be followed
(12)
➢ Define demand schedule: Table showing the numerical
relationship between price and quantity demanded.
➢ Construct demand schedule
Price $
10
9
8
7
6
5
4
QD Per
day
1
2
3
4
5
6
7
The above demand schedule is showing the inverse relationship
between price and quantity demanded that is when there is decrease
in price, there will be an increase in quantity demanded.
➢ Construct demand curve based on demand schedule.
The above demand curve slopes downward showing the inverse
relationship between price and quantity demanded.
➢ Define Budget line: Line showing the different combinations of
two products that consumer can purchase given the income of
consumer and price of products.
➢ Construct budget line
In the above diagram consumer income is $200.The price of product A
and product B is $20 and $ 10 respectively. Diagram is showing the
different combinations of A and B that consumer can purchase (Note:
explain different combinations by yourself).
➢ There are several differences between demand schedule and
budget line.
• Demand schedule shows the different quantities of same
product that consumers are willing and able to purchase at
various prices over certain time period, other things remain
constant. It slopes downward showing the inverse
relationship between price and quantity demanded. In
contrast budget line shows the combinations of two
products that consumers can purchase with given income
and price of products. It does not show the willingness and
ability of consumer to purchase the product.
• Whenever there is change in price, .there will be
movement along the demand curve.
• On the other hand in case of budget line when there is
change in price of both products given the income of
consumer, there will be shift in budget line. If there is
change in price of one product given the income, there will
be pivotal shift in budget line as shown by the following
diagram.
In the above diagram when there is an decrease in price of product B
from $10 to $6.67, given the price of product A and income of
consumer that is $200, budget line shift leftward and shift is pivotal
showing that this will not affect the quantity of product A but
quantity of good B consumer can purchase will increase.
• When income rises, demand curve for normal goods will shift
rightward and demand curve for inferior good shifts leftward.(
explain the difference between normal goods and inferior
goods)
The above diagram figure (i) is showing that when there is an
increase in income, demand curve for normal good shifts
rightward (from D to D1) showing increase in demand and for
inferior good it shifts leftward ( D to D2) showing decrease in
demand. But in case of budget line for both normal good and
inferior good budget line shifts rightward when there is an
increase in income as shown by figure (ii) because budget line
shows the combinations of two products that consumer can
purchase at new income given the price of products.
➢ The two curves, however are similar in a way that both on their
own can not point the new quantity that consumer will purchase
when there is an increase in income.
➢ In case of demand curve ,we need supply curve in order to
indicate the quantity that consumer will purchase when there is
an increase in income
➢ In case of budget line, we need to have indifference curve to
indicate what consumer can purchase when there is an increase
in income.
==========================================================