In: Economics
IN AN INDIFFERENCE CURVE SCHEDULE EQULIBRIUM OCCURES WHERE BUDGET LINE IS TANGENTIAL TO INDIFFERENCE CURVE. ALONG AN INDIFFERENCE CURVE UTILITY OR SATISFACTION IS EQUAL FOR AL COSUMPTION OR BORROWING. THE DIAGRAMS ARE ATTACHED BELOW:
IMAGE 1
a)
b)
PRICE CHANGES DUE TO TWO REASONS. EITHER CHANGE IN SUBSTITUTE DEMAND OR CHANGE IN PRICE. HERE DUE TO CHANGE IN SUBSTITUTE DEMANE BUDGET LINE HAS MOVED FROM BB1 TO MN AND IS TANGENTIAL TO SAME INDIFFERENCE CURVE. THIS MEANS BY SUBSTITUTE GOOD CONSUMER RECIEVES SAME SATISFACTION. NOW DUE TO CHANGE IN INCOME BUDGET LINE HAS SHIFTED TO BB2 AND IS TANGENTIAL TO A HIGHER IC. THIS MEANS BY CHANGE IN INCOME CONSUMER HAS STARTED DERIVING HIGHER SATISFACTION. THIS PHENOMENON IS DEPICTED IN THE FIGURE ABOVE.