Page 57 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Figure 4.4: Comparison between Lower and Upper Indifference Curves

b
Quantity of Y c d

Y
a
IC
2
IC
1
O X
Quantity of X
The vertical movement from point a on the lower indifference curve IC to point b and Quantity
1
of X on the upper indifference curve IC , means an increase in the quantity of Y by ab, the
2
quantity of X remaining the same (OX). Similarly, a horizontal movement from point a to d
means a greater quantity (ad) of commodity X, quantity of Y remaining the same (OY). The
diagonal movement from a to c, means a larger quantity of both X and Y. Unless, the utility of
additional quantities of X and Y are equal to zero, these additional quantities will yield additional
utility.
Therefore, the level of satisfaction indicated by the upper indifference curve (IC ) would always
2
be greater than that indicated by the lower indifference curve (IC ).
1
4.3.3 Budget Line

The budget line is also known as the price line, the consumption possibility line or the price
opportunity line. It represents different combinations of two goods X and Y which the consumer
can buy by spending all his income.

Example: A consumer having 1200 as income can buy 600 units of Y at 2 per unit or 300
units of X at 4 per unit as shown in Figure below. The straight line joining the two points A and
B is called the budget line.

Budget Line

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