OUM Business School
JANUARY / 2017
BBEK2103
Microeconomics
MATRICULATION NO:
950101125849001
IDENTITY CARD NO.
:
950101125849
TELEPHONE NO.
:
0168226118
E-MAIL
:
[email protected]
LEARNING CENTRE
:
Sabah Learning Centre
The indifference of curve
1

When the choice involves only two goods, that is, good X and good Y, an indifference
curve will show the various combinations of the good X and good Y that can give equal
satisfaction to the customer.
Assume that you seek out the help of a friend to choose his preferred combination of the
two combinations of the good X and good Y.
Combination A = 2 units of X + 6 units of Y
Combination B = 2 units of X + 4 units of Y
Your friend will definitely choose combination A because although the quantity of X is
the same in the both combinations, the combination A has more of the good Y. if we
assume that combination A is chosen, then we know that any other combination with
more of good X or Y or more of both goods, will definitely be preferred than combination
A.
What if the choices involve the combination C with three units of X and five units of Y?
Even through the quantity of Y in the combination C is less compared to combination A,
the quantity X is larger. Your friend may be able not to make a choice because he may
feel that both combinations (A and C) can give equal satisfaction.
When you are able to identify all the combinations that can provide an equal level of
satisfaction and connect those combinations together, then we will obtain an indifference
curve.
Furthermore, if you are able to identity other combinations that can give a higher
or lower level of satisfaction and build the particular curve, then you have already formed
an indifference map.
The budget line
You have already seen various types of lines and curves, but what is a budget line? The
budget line is important in a difference analysis because it determines the actual choice
that will be made by the rational consumers. The indifference curve shows the
consumers` priority while the budget line indicates budget constraints or ability to
purchase.
The budget line is a curve that shows the combinations of two goods that can be
purchased by the consumer using a certain amount of the income and the based on the
2

market price of the good.
Assume that you have an allocation of RM10 to be spent on good X and good Y where
the price of X (Px) is Rm1 and Py = Rm2. The combination of consumption that you can
afford to purchase is as shown in table below.
If you spend all the money to purchase Y, you will obtain five units of Y; and you will
obtain 10 units of X if you decide to spend all of the money on X. You can also choose
any of the combinations that satisfies the rule I = PxX + PyY, that is, income (I) is
equivalent total expenditure (PxX + PyY).
a)
The effect of changes in Income
Now assume that your income has increased from RM10 to RM20 and the price
remains unchanged. The increase in your income will allow you to purchase the
maximum amount of 10 units for Y and 20 units for X. Therefore, the budget line
3
Combination
X
Y
A
10
0
B
8
1
C
6
2
D
4
3
E
2
4
F
0
5
Budget Line
A
B
C
D
E
F