Teaching Objectives

The primary objective of this appendix is to show how a demand curve can be constructed using indifference curve and budget line analysis. The indifference curve is first explained, then the budget line is presented. By combining the two, consumer equilibrium is obtained. The price of one good is then lowered, and the resulting demand curve drawn.

Unique features include discussing what the indifference curve can and cannot look like and constructing the demand curve from a series of consumer equilibrium points.

The entire appendix warrants special coverage only if the instructor feels that the students are working at a high enough level to grasp the material. Carefully draw each graph and track the figures in the appendix meticulously. Ensure that your students follow each step completely.

The appendix links with the chapter on consumer analysis as a logical progression of utility theory and as an alternative way to construct a demand curve. It offers an attractive alternative for those economists who do not like utility theory.

Key Term Review

indifferent
indifference curve
indifference map
budget line

Lecture Outline and Teaching Strategies

1. Indifference Curves

Indifference curves show the various combinations of two goods that yield identical utility and to which the consumer is indifferent. The guiding rule for indifference curves is that more is preferred to less.

Teaching Strategy: Using the examples of CDs and gasoline in Figure 1, construct an indifference curve.

1.a. The shape of indifference curves: Indifference curves slope downward from left to right, indicating that to maintain constant utility, as less of one good is consumed, more of another must be.

Teaching Strategy: Try to show why the vertical, horizontal, and upward-sloping lines drawn in Figure 2 could never represent an indifference curve.

1.b. The slope of indifference curves: The rate at which a consumer is willing to exchange one good for another to maintain constant utility is determined by consumer preference. Thus consumer preference is reflected in the slope of the indifference curve.

Teaching Strategy: Analyze points D, E, and F in Figure 3 in terms of surrendering fewer CDs for more gasoline as gasoline consumption increases and CD consumption declines. Tie this to the law of diminishing marginal utility.

1.c. Indifference curves cannot cross.

Teaching Strategy: Use Figure 4 to show that if two indifference curves intersect, the points on the two different indifference curves (C and A) would have identical utility value, which is illogical because the consumer prefers more to less (i.e., C to A).

1.d. An indifference map: This indicates consumer preference among all combinations of goods and services. The further from the origin, the more preferred an indifference curve becomes.

2. Budget Constraint

The budget line is a line showing all the combinations of two goods a consumer can buy at given prices with a fixed budget.

Show that the budget constraint is similar to a PPC. In particular, point out that the slope of the budget constraint represents opportunity costs.

Teaching Strategy: Carefully draw Figures 6(a), (b), and (c). Stress that more income/lower prices moves the budget line to the right, and vice versa.

3. Consumer Equilibrium

The consumer maximizes satisfaction by purchasing the combinations of goods on the indifference curve farthest from the origin that are attainable given a budget line.

Teaching Strategy: Draw Figure 7, citing attainable, unattainable, and optimal points. Stress that C is where the indifference curve is just tangent to the budget line. This point determines the maximum combination of CDs and gasoline that the consumer is both willing and able to buy.

To generate a demand curve, lower the price of one good, rotate the budget line out, and indicate the greater amount thus purchased. From these points a demand curve can be constructed.

Teaching Strategy: Draw and explain Figures 8(a) and (b). This is the objective of the appendix.