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I am having Econ 202 trouble

  • Thread starter Thread starter Q
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Q

Q

Lifer
I understand a budget constraint is the price/quantity of two goods that you buy vs your income, and any point on the line is a combination that you can afford.

But what exactly is the point of an indifference curve? Wiki says
In microeconomic theory, an indifference curve is a graph showing different bundles of goods, each measured as to quantity, between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. In other words, they are all equally preferred.
Click to expand...

I am having trouble seeing the difference b/t the two. If someone could provide me with an example of a 'bundle' of goods and such, that would really help me.

Thanks in advanced.
 
The difference is the cost of apples and oranges are different, along an indifference curve, you get the same utility but it will cost you different amount. Therefore the optimal combination is where you can minimize your spending on the indifference curve.
 
Budget constraint is just hte total amount of money a person can spend to pick and choose between different amounts of different goods and services.

edit: read the guy below me

Hope that makes sense, i'm not an econ major so this might be wrong or really poorly worded
 
2 months into a semester and you are still struggling with indefference curves? ruh roh.

Think of it this way, I have an utility function for Xbox games and dvd movies.

u = 2x+d

Now if you made a table where all values are equal to certain utility (note: in econ why try to maximize utility, not set to a number, but ignore that for this illustrative example)

u = 10, we can have these bundles

(x,d) (5,0) (4,2) (3,4) (2,6) (1,8) (0,10)

The curve on a graph with the two items set as the axis is your indifference curve. It means you do not prefer any single bundle over any other bundle on the curve. I would be just as happy with 5 xbox games and zero movies as I would be with one xbox game and 8 movies.

Now lets bring in budget constraint, I have $200 and an Xbox game costs $50 and a DVD movie costs $20. I can purchase at most 4 games and 0 movies or 10 movies and 0 movies or some bundle in between. You should be learning how to figure this out with calculus, but for the sake of this example, we will stick to arithmetic.

(x,d): (4,0) (3,2) (2,5) (0,10)

note: three games and two movies leaves $10 left over, since we can't get half a movie, we will just ignore it for right now.

the utility of each situation is:
2(4)+0 = 8
2(3)+2 = 8
2(2)+5 = 9
2(0)+10 = 10

So in this extremly simple case, you maximize your utility by choosing 10 movies and zero video games. Why is this the case? Go to simple calculus, the derivative of 2x+d (aka your marginal utility of x) = 2, the price of games over the price of movies is 2.5, since 2.5>2, we will only choose movies.

If the cost of games was $30 (or a px/pd = 1.5) then you would choose only games. The budget constraint isn't that important in this example since regardless of whether I had $100 or a a million dollars, I would still choose only movies or only games. Once you get into quadratic and higher functions, that si where the constraint really starts to effect the problems.
 
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