y
x
xy
MU
MU
MRS =
or
MRSxy has the following properties:
1.MRSxy tends to reduce when moving
along the indifference curve from left to
right. Consumers will give up smaller
quantities of Y to increase by one unit the
consumption of good X.
2. MRSxy is the measurement of the slope of
an indifference curve at a particular point
on that indifference curve (figure 6).
A
B
U1
Y
X
Moving from A to B: the slope
of indifference curve will be
higher in the point A than in a
point B
U
1
U
2
X
Y
Special cases of indifference
curves
X
Y
U1
U2
U3
U4
U5
U1
U2
U3
X
Y
X
Y
A
B
H
K
0
I/Py
I/Px
The budget line is a set of
alternative combinations of
quantity of good X and Y that
the consumer can buy.
What is attainable ?
The budget line equation can be represented as
follows:
Y y X x
Q P Q P I + =
To draw a straight line is sufficient to know its two
extreme points:
X
y
x
y
r
Q
P
P
P
I
Q =
y
x
y
x
x
Q
P
P
P
I
Q =
The slope of the budget line in absolut value is
the tangent of the angle ABO of triangle AOB
(figure 11):
Py
Px
Px
I
Py
I
OB
AO
tgABO = = =
E
B
C
D
M
F
0 1 2 3 4
5
6
(I/Px ,O)
A
X
2
4
6
8
10
Y
N
(O,I/P
y
)
C
a
k
e
Cola
C
a
k
e
Cola
7
10
14
J
A
M
N F K
I =30 lei
I =42 lei
I2 =21 lei
7 5 3,5
X
Y
a) Consequences of changes in
consumers disposable income
I, Px, Py constant
(Px=6 lei, Py=3 lei) The budget line will shift
up (to the right), paraleel
to the original line (figure
13).
X
Y
Cola
C
a
k
e
A
F
5
H
10
10
P
x
=3 lei
P
x
=6 lei
P
x
+
b) Consequences of changing of price of good
X (Px)
I, Py constant
1. Decrease of price of good X
(Px), ceteris paribus, leads to
decrease of the slope of buget
line in absolut value.
X
Y
A
F N
10
5 2,5
P
x
=6 lei
P
x
=12 lei
P
x

C
a
k
e
Cola
2. As the price of good X rises
(Px), the absolute value of the
slope of a buget line increases
comparativ to the absolute
valueof the slope of initial
budget line
Px; I constant; Py constant
Consumer equilibrium. Consumer reaches equilibrium
state, when he fully uses his disposable income and maximizes
satisfaction from the consumption of set of goods (X,Y).
Rational consumer choice can be summarized in the
following table:
QUESTION PROBLEM
GRAPHICAL
INTERPRETATION
What want
consumers?
Prefferences Indifference Map
What can
consumers?
Constraints Budget line
What do
consumers?
optimal choice of
consumer
Point of
equilibrium of
consumer
Graphic, the point where the budget line is tangent to
the highest attainable indifference curve determines the
equilibrium (optimum) of consumer. At this point, the slope
of indifference curve (reflects the MRSxy) equals to the
slope of the budget line (is Px / Py):
y
y
x
x
y
x
y
x
y
x
y
x
P
MU
P
MU
sau
P
P
MU
MU
P
P
MU
MU
= = =
The consumers equilibrium condition requires that
the ratio of marginal utilities of goods X and Y is equal
to the prices ratio.
The utilitymaximizing combination of good X and Y
provides to consumer the maximum possible satisfaction
compared to other alternatives.
Cola
a
E
c
d
C
a
k
e
A
F
X
Y
8
6
2
1
10
5
0
1 2 8
U
1
U
2
U
3
U1
U2
U3
A
Qx
Qy
0
In some cases the consumer is willing to buy only one
good from the market basket, giving up the other good.
MRSxy being higher or lower than the prices ratio.
Such equilibrium is called corner equilibrium.
In case when consumer purchases only
good Y (Qx = 0), equilibrium is at point A,
where MRSxy < Px / Py.
Qx
Qy
U1 U2 U3
B
0
When consumers buy
only good X (Qy =
0),equilibrium of consumer
is in point B, where:
MRSxy > Px / Py. When
Equilibrium point of consumer is affected by changes in
disposable income and commodity prices.
The case of change of consumer disposable income.
The sensitivity of consumer equilibrium to income
changes can be described by drawing two curves:
incomeconsumption curve and Engels curve (figure
18).
1. An increase in consumer income (I), moves the
budget line parallel to itself to the right and consumer
equilibrium point E
0
moves to right (up) to the point
E
2.
2. A decrease in consumer income (I ), moves the budget
line parallel to itself to the left and consumer
equilibrium point moves to the left (down) to the
point E
1
(figure 18a).
X
Y
E
1
E
0
E
2
0
X
I
I
1
I
0
I
2
E
2
E
0
E
1
I 
U
1
U
2
U
3
I+
A
B
C
D N
M
X0 X1 X2
X0 X1 X2
Incomeconsumption is the unity of
consumer optimum points E
0
, E
1
, E
2
corresponding to all possible levels of money
income, ceteris paribus.
Engels curve (E. Engel (18211896) is
derived from the incomeconsumption
curve and shows the amount of a good that
the consumer would purchase per unit of time
at various income levels.
X
Y
U
3
U
2
U
1
O
The positioning trajectory of
incomeconsumption curve and
the Engel curve is influenced by
the nature of the consumption
goods.
For primary necessity
goods,
curve is very steep
and close tothe OY
axis.
1 0 < <
c
d
I
X
Y
U
1
U
2
U
3
O
For luxury goods,
curve is close to the axis OX
1 >
E
d
I
X
Y
U
1
U
2
U
3
O
For inferior goods,
0 <
E
d
I
X
Y
U
1
U
2
U
3
For neutral goods, .
Incomeconsumption
curve is represented by a
vertical line.
0 =
E
d
I
Cloth
House
Food
C
o
n
s
u
m
p
t
i
o
n
e
x
p
e
n
d
i
t
u
r
e
s
Income of
households
Christian Engel was a XIXth century German statistician
who did pioneering work related to such curves,which are
important for studies of family expenditure patterns. Looking
to Engel the family expenditures for food will rise in less
degree than income increases. The higher the proportion of
income spent on food in a nation, the poorest the nation is
taken to be.
Agrement
1,9
Comunicaii
4,7
Transport
4,5
Sntate
5,9
Dotarea locuinei
3,7
ntreinerea
locuinei
15,3
nvmnt
0,5
Hoteluri,
restaurante
2,3
nclminte,
mbrcminte
11,6
Buturi
alcoolice, tutun
1,9
Produse
alimentare
43,7
Diverse
3,9
0 10 20 30 40 50 60 70 80
Tanzania
Madagascar
Vietnam
Sierra Leone
Indonezia
Moldova
rile cu venituri joase:
Argentina
Mexic
Rusia
Thailand
Brazilia
rile cu venituri medii:
Danemarca
Marea Britanie
Canada
SUA
Japonia
rile cu venituri nalte:
Figure 26.
The part of
expenditures
for food in the
family budget
in %.
The CASE OF A CHANGE IN THE PRICE OF A
GOOD, CETERIS PARIBUS:
a) IF Px, the absolute value of the slope of the
budget line increases and the budget line will change
its initial position from AB to AC, and the point of
equilibrium will move from E
0
to E
1
(figure 26a).
b) If Px, the absolute value of the slope of the
budget line decreases and the budget line will change
its initial position from AB to AD, and the point of
equilibrium will move from E
0
to E
2
.
X
Y
P1
P0
P2
Y1
Y2
Y0
E1
E0
E2
X1 X0 X2
U
1
U
2
U
3
D
A
B C
E1
E0
D
X1 X0 X2
E2
THE SUBSTITUTION AND INCOME EFFECT in the
case of NORMAL GOODS
Total effect of changes in the price of a good can be divided
into two effects: the income effect and substitution effect.
The substitution effect measures the increase in the
quantity demanded of a good when its price falls
resulting only from the relative price decline and independent of
the change in real income. If the price of good X decreases, the
consumer substituites good Yby good X, purchasing less of the
good Y and more of good X, moving to another point on the Same
indifference curve.
The income effect measures the increase in the quantity
purchased of a good resulting from the increase in real income and
purchasing power of a consumer that accompanies a price decline.
This effect involves the movement from initial indifference curve
to another curve. The income effect depends on the nature of the
goods.
Cola
C
a
k
e
1 2 3 4 5
6 7 9 8 10
1
2
3
4
5
6
7
8
9
10
A
H
b
v
k
M
F N
I=30 lei
Px=6 lei
I=21 lei
Px=3 lei
I=30 lei
Px=3 lei
Y
X
Surplus of consumer
Paradox of A. Smith diamants
water
The Value of time
Cash and noncash giftgiving
Application of the theory of consumer
behavior:
0 0 1 2 3 4 5 6 1 2 3 4 5 6
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
Price Price
Access to Internet (hour) Acces to Internet (hour)
D
D
Market price
Surplus of
consumer
Surplus of
consumer
a) Individual demand b) Market demand