MSIN0181: Understanding the Information Economy
Topic 1: Indifference Curves and Budget Lines
Budget Lines
Budget Equation: Price (x1) * Quantity (x1) + Price (x1) * Quantity (x1)
P1x1 + P2x2 = M
• Optimal consumption of products will be on the budget line
• Prices fall: budget line get shallower
• Prices rise: budget line gets steeper
Budget line of product B (bourbon creams) versus product J (Jaffa cakes)
If the price of J has fallen - the budget line changes to:
, The price of product B has not changed, however, as the price of product J has decreased,
consumers can purchase more of product J for cheaper.
When the price of only one good changes, the budget line twists. So if you are allocating all your
budget to the good whose price hasn't changed, you'll notice nothing/
• The ratio of the two price: P(B) over P(J) is key
Utility and Optimisation
Key Assumption: consumers wish to get as much utility as they can. They are consistent in their
preferences and experience diminishing marginal utility as the consumption of a good goes up
(utility is depicted using indifference curves)
• It should be the case that adding successive amounts to your consumption yields
successively less and less utility.
Indifference Curves
• An indifference curve is a depiction of all the bundles that one could consume that
give us the same level of utility
o This is how we depict utility
• All points on the curve will yield the same amount of utility.
• The optimal point must be tangent to the budget line.
• Higher utility is experienced the further away the curve is from the axis
Topic 1: Indifference Curves and Budget Lines
Budget Lines
Budget Equation: Price (x1) * Quantity (x1) + Price (x1) * Quantity (x1)
P1x1 + P2x2 = M
• Optimal consumption of products will be on the budget line
• Prices fall: budget line get shallower
• Prices rise: budget line gets steeper
Budget line of product B (bourbon creams) versus product J (Jaffa cakes)
If the price of J has fallen - the budget line changes to:
, The price of product B has not changed, however, as the price of product J has decreased,
consumers can purchase more of product J for cheaper.
When the price of only one good changes, the budget line twists. So if you are allocating all your
budget to the good whose price hasn't changed, you'll notice nothing/
• The ratio of the two price: P(B) over P(J) is key
Utility and Optimisation
Key Assumption: consumers wish to get as much utility as they can. They are consistent in their
preferences and experience diminishing marginal utility as the consumption of a good goes up
(utility is depicted using indifference curves)
• It should be the case that adding successive amounts to your consumption yields
successively less and less utility.
Indifference Curves
• An indifference curve is a depiction of all the bundles that one could consume that
give us the same level of utility
o This is how we depict utility
• All points on the curve will yield the same amount of utility.
• The optimal point must be tangent to the budget line.
• Higher utility is experienced the further away the curve is from the axis
