Question

(i) With the aid of appropriate diagrams, explain why indifference curves are traditionally convex to the origin. (10%)

(ii) Given the indifference curve for two-goods is convex, derive a price inelastic demand curve for Good X (10%)

(iii) With reference to the previous elements of this coursework question, discuss the links between the indifference curve, price elasticity estimates and the theory of supply and demand in economics (80%).

Answer 1

The Answers are stated below:

(i) : The indifference curve are convex to the origin because of the law of diminishing marginal rate of subsitution.of the product.Subsitution means the goods we leave for another good. The susitution effect is the result of change in the income level of the consumer. The diagram is placed below:

.

(ii) The price inelastic demand means there is no change in demand due to change in price or it is very negligible change. The indifference curve at various budget lines are shown in below diagram, X,Y denotes the goods, IC1,IC2 and IC3 are various indifference curves. The inelastic demand shows the level and intersect all three IC.

(iii)There is always change in Demand according to the change in price. In general term when demand increases, prices of the goods inceases keeping other things constant and when supply increases, price decreases and because of both the substitution effect and income effect, this gets vice versa as well. In other words, there is an inverse or positive relationship between quantity demanded or supplied and price. To measure the degree of senstivity between these two variables we calculate the price elasticity of demand and supply. In indifference curve all the points on an indifference curve provides different combinations of two goods( x,y) the cosumer is indifferent in buying the goods due to subsitution effect of the goods. This differs for various products according to elasticity of the product and any change in their indifference curve is due to the change in income levels.

So there is direct link between the indifference curve, price elasticity estimates and theory of demand and supply as these parameters effect in calculation.