DEPARTMENT OF TECHNICAL EDUCATION
ANDHRA PRADESH
Name : H. Srividya
Designation : SL / CCP
Institute : GPW, Palamaner, Chitoor dist
Branch : Commercial and Comp. practice
Semester : V Semester
Subject : Business Economics
Sub-Code : CCP-502
Topic : Consumer Surplus
Duration : 50 minutes
Sub Topic : Indifferent curves Analysis
Teaching Aids : PPT, animation
CCP502.28 1
Objectives
On completion of this period, you would be
able to:
Explain the Marginal Rate of Substitution
Describe Price Line or Budget Line
CCP502.28 2
Recap:
In the previous period, we have discussed
about:
Scale of preferences
Indifference Schedule
Indifference Curve
Indifference Map
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Marginal Rate of Substitution
Important tool of Indifference Curve Analysis
Obtained from Indifference Schedule
Defined as-
The rate at which an individual will exchange
successive units of one commodity for another
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Sample Indifference Schedule
Combination Bananas Biscuits
First 1 20
Second 2 15
Third 3 12
Fourth 4 10
Fifth 5 9
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Marginal Rate of Substitution
After First
combination Combina- Bana Biscuits
1 - 20 tion nas
He prefers 2 - 15 First 1 20
substitutes one Second 2 15
Third 3 12
banana for 5 biscuits
Fourth 4 10
Marginal Rate of
Fifth 5 9
Substitution = 1:5
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Marginal Rate of Substitution
In the next
Combina- Bananas Biscuits
combination
tion
He substitutes one First 1 20
banana for 3 biscuits Second 2 15
Marginal Rate of Third 3 12
Substitution =1:3 Fourth 4 10
Fifth 5 9
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Marginal Rate of Substitution
In the fourth Combina Banana Biscuits
combination -tion s
He substitutes one First 1 20
banana for 2 biscuits Second 2 15
Marginal Rate of Third 3 12
Substitution =1:2 Fourth 4 10
Fifth 5 9
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Marginal Rate of Substitution
In the last Combina- Bananas Biscuits
tion
combination
First 1 20
He substitutes one
Second 2 15
banana for 1 biscuit
Third 3 12
Marginal Rate of
Fourth 4 10
Substitution =1:1
Fifth 5 9
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Marginal Rate of Substitution
For the Second combination = 1:5
For the Third combination = 1:3
For the Fourth combination = 1:2
For the last combination = 1:1
MRS is diminishing
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Marginal Rate of Substitution
Y
As the sacrifice of
biscuits for additional
banana is diminishing,
Biscuits
the marginal rate of
substitution declines
and so is its curve IC
O X
Bananas
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Price Line
Also called as
Budget line
Price Ratio etc.
It shows the different combinations of two
goods that a consumer can get with a given
income and market prices
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Price Line
Market Price Combinations available at Rs.5
Banana – Re.1 each Bananas Biscuits
Biscuit – 0.50 paise 0 10
1 8
each
2 6
A consumer has Rs. 5
3 4
with him to spend on
4 2
bananas and biscuits
5 0
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Price Line
With the given Rs.5 & at given Market
prices
A consumer can have
0 banana & 10 biscuits
1 banana & 8 biscuits and so on
If we plot this on graph, we get Price line
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Price Line
Y NM is the Price Line
(0,10)
N
(1,8)
(2,6)
Biscuits
(3,4)
(4,2)
(5,0)
X
O M
Bananas CCP502.28 15
Summary
In this period, we have discussed about
Marginal Rate of Substitution
Price line
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Quiz:
1. Giving up of units of one commodity for the
additional unit of another commodity is
called__________
a) Indifference Curve
b) Indifference Map
c) Marginal Rate of Substitution
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Contd..
1. Marginal Rate of Substitution gradually_______.
a) Increases
b) Diminishes
c) Does not change
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Frequently Asked Questions
1) Explain Marginal Rate of Substitution in
Indifference Curve Analysis
2) What is meant by Price line?
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Assignment:
1. Explain why indifference curve analysis
depends on Marginal Rate of Substitution.
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