Welcome back to my blog! Last time, we cover some concept about utility, which can be defined as a want-satisfying power, the satisfying or pleasure one gets from consuming a product. In today’s blog, I will introduce the Indifference curve and Budget line.

Indifference curve shows the different combinations of two goods that give a consumer equal satisfaction (utility).Here are some features of indifference curve:

• Higher indifference curve represents higher levels of utility
• Downward sloping
• Cannot cross
• Concave

Budget lines shows the combination of two products obtainable with given income and prices. The emerge of budget is due to the fact that all individuals must face two facts of economic life: have to pay prices for the Good&Services they buy, and have limited funds to spend. Budget Iine is somehow similar to the production possibility curve that we covered in the last semester. Both of them show the limits, but the main difference is that the production possibility curve is showing the production with limited resource, and the budget is showing the consumption with limited funds. All the points on the budget line and below the budget is affordable, but all the points above the budget line is not affordable, and they does not exist.

Budget can be changed by two reasons. Firstly, the change in income. Increase in income will shift the budget line upward (and rightward), and decrease in income will shift the budget line downward (and leftward). Keep it in mind that all shifts are parallel, which means that the changes in income do not affect the budget line’s slop. Secondly, Changes in price. In each case, one of the budget line’s intercepts will change, as well as its slope. When the price of a good changes, the budget line rotates, and both its slope and one of its intercepts will change.

While a rational consumer is making decision. He or she will buy one product on the exact point where the budget line is intersect with the indifference curve. At that point, the consumer’s utility is maximized, because he or she is spending all the money that he have on the two product, and gaining the equal satisfaction from these two product. Remember what we said in the last blog? “while the utility that the consumer gain from each product is same, the consumer will have the maximum utility”.

After the discussion of Indifference curve and Budget line, I will introduce the Substitution effects and Income Effect.

Substitution effects (change of relative price) means that as the price of a good falls, the consumer substitutes that good in place of other goods whose prices have not changed. Income effect shows that the increase in income will shift the budget line outward.

What is the relationship between these two effect and the demand of products? I will solve this problem in the next blog.