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Indifference Curves and Demand for Inferior Goods

Question

Consider, for an inferior good, the relationship between indifference curves, budget lines, price changes and demand curves. [13]

Category:

Consumer Theory and Demand Analysis

[CIE A level March 2019]

Preview Answer


Step ➊ : Define 'indifference curves, budget lines and inferior goods' in the introduction.


Indifference curves and budget lines can be used to explain the effect of price changes and income changes of inferior goods. An inferior good is a good whose demand drops when people's incomes rise. Consumers maximise satisfaction and determine demand by relating utility to price; this is shown by indifference curves and budget lines. An indifference curve shows all the various combinations of two goods that give an equal amount of satisfaction or utility to a consumer. The budget line shows what combinations of two goods an individual is able to buy, given the income available to spend on them and their prices. In this essay, we will discuss the relationship between indifference curves, budget lines, price changes and demand curves for inferior goods.


Step ➋ : Explain the income and substitution effects of price change for inferior goods.


➤ 2.1 An increase in income is represented by a parallel shift outwards of the budget line. This will then lead to a new optimum consumption point on a higher indifference curve. This can be shown in the figure below.

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