Plagiarism Prevention 4. 11.3 the individual maximises his satisfaction at point E2 where his budget line is tangent to indifference curve IC2. will work for less hours). The loss of satisfaction to the consumer on account of the downward movement must be made up by the gain through the rightward movement. Now, the important question is what is the money value of this price subsidy (RM) on food to the individual. This cookie is set by GDPR Cookie Consent plugin. After reading this article you will learn about: 1. It will be seen from Figure 11.1 that budget line EF touches the indifference curve IC at a point S and is buying OB quantity of food. In the case of any consumer, the utility refers to gain from the consumption of two commodities. Each indifference curve represents various alternative combinations of income and leisure which provides equal level of satisfaction to the individual and the farther away an indifference curve is from the origin, the higher the level of satisfaction it represents for the individual. Price-Income Line or Budget Line (With Diagram). When no price subsidy is paid, the individual faces the price line PL1. However, such a situation is relevant in case of a poor family whose income is so small that it cannot buy even the rationed quantity. (9) An indifference curve is smooth and continuous which means that the two goods are highly divisible and that level of satisfaction also change in a continuous manner. he always prefers larger bundle as it gives him higher satisfaction. Food Stamp Programme: In-kind Food Subsidy: Food stamp programme is a type of food subsidy to provide poor people with adequate quantity of food. That is, income effect of the rise in wage rate on leisure is positive, that is, leads to the increase in the hours of leisure enjoyed (that is, tends to decrease labour supply). We shall study below that indirect tax such as excise duty income causes excess burden on the individuals, that is, indirect tax reduces welfare more than the direct tax, say income tax when an equal amount of revenue is raised through them. At this new equilibrium point E2 he is purchasing Of2 quantity of food and ON2 of other goods. (12) The consumer is in a position to order all possible combinations of the two goods. Now, if no food subsidy was given and therefore the price line was PL1, then for buying OA quantity of food, the individual would have spent PN amount of money. By purchasing OA quantity of food, the individual is spending PT amount of money. In other words, PN is the market price of OA quantity of food. The Derivation of Demand Curves from Indifference Curves on JSTOR. As a result of the rise in price of good X, the price line rotates to a new position PL2 which is tangent to indifference curve IC1 at point Q1. We also use third-party cookies that help us analyze and understand how you use this website. MRS between income and leisure equals the wage rate (w) that is, the market exchange rate between the two. On the other hand, an indirect tax is one which can be passed on or shifted to others by raising the prices of the goods. Required fields are marked *. If the amount substituted is imperfect, the marginal rate of substitutionMarginal Rate Of SubstitutionThe marginal rate of substitution (MRS) is the rate at which some units of an item can be replaced by another while providing the same level of satisfaction to the consumer.read more will be constant. (6) He prefers more of X to less of Y or more of Y to less of X. The farther the Indifference curve from the origin, then: 2. AB is tangent to indifference curve IC1 at point S at which he supplies TL2 hours for work. Share Your Word File
They may represent higher or lower satisfaction of the consumer. This means that up to a point substitution effect is stronger than income effect so that labour supply curve slopes upward, but beyond that at higher wage rates supply curve of labour bends backward. This is because cash subsidy does not limit a person that he must purchase certain amount of food and is therefore free to spend as he likes. But opting out of some of these cookies may affect your browsing experience. Consumer goods are the products purchased by the buyers for consumption and not for resale. (8) An indifference curve is always convex to the origin. The second possibility of the effect of food stamp subsidy is illustrated in Fig. Consumer Surplus = Maximum Price to be paid willingly Actual Paid Price. Each individual axis indicates a single type of economic goods. This leads us to income-leisure constraint which together with the indifference map between income and leisure would determine the actual choice by the individual. Image Guidelines 5. Now, suppose with the introduction of rationing, ration limit R is fixed for good X and R, for good Y. 200 per week which he can spend on food alone. It will be seen from Figure 11.1 that PE is less than RM which is the amount of money paid by the Government as subsidy. Now, suppose the individual is given food stamps of Rs. Usually, the combination with the higher satisfaction level is preferred. We will also demonstrate how the effect of food-stamp subsidy differs from cash subsidy. That is, at wage rate w0he supplies TL0 amount of labour. Jack is satisfied with 1 unit of cloth and 8 units of books. However, the final result of the two types of subsidies depends on the value of food stamps relative to preferences and incomes of the individuals whom subsidies are granted. In this figure we measure money income on the Y-axis and leisure (reading from left to right) and labour supply (reading from right to left) on the X-axis. It is for this reason that we reject indifference curves of concave or straight-line shapes and assume that indifference curves are normally convex to the origin. The cookie is used to store the user consent for the cookies in the category "Analytics". Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. Perfect complementary goods are used in a certain fixed ratio. An indifference curve has a negative slope, i.e. Thus, in Figure 11.5, imposition of an equivalent lump-sum or income tax, the consumer moves from the equilibrium position Q3 on indifference curve IC3 to the new position Q2 on indifference curve IC2 which represents the income effect. These cookies will be stored in your browser only with your consent. The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". By clicking Accept, you consent to the use of ALL the cookies. An indifference curve is a graph that represents the different combinations of two goods that give an individual the same level of satisfaction or utility. Ration limit is potentially binding here because due to ration limit the consumer cannot buy any set of two commodities lying in the region SLRX, if he so desires though his price-income situation permits him to do so. Consider Figure 11.15 where leisure is measured in the rightward direction along the horizontal axis and the maximum leisure time is OT (equal to 24 hours). We use cookies to personalise content and ads, to provide social media features and to analyse our traffic. Now, with TM1 as new income-leisure constraint line, the individual is in equilibrium at point H at which he supplies TL1 work-hours of labour which are less than TL0. It provides equivalent satisfaction and utility levels for the consumer. It is thus clear that as a result of the imposition of excise duty, the individual has shifted from a higher indifference curve IC3 to a lower one IC1, that is, his level of satisfaction or welfare has declined. For instance, the aim of Governments food subsidy programme may be that the needy families should consume more food so that their health and efficiency may be improved. It Studies Combinations of Two Goods Instead of One Good 3. But a glance at Fig.8.5 will show that this is absurd conclusion since combination A contains more of good Y than combination B, while the amount of good X is the same in both the combinations. Pen and ink, right shoe and left shoe, automobile and petrol sauce and hamburger, type writer and typists are some examples of perfect complements. Property I. Indifference curves slope downward to the right: This property implies that an indifference curve has a negative slope. It Provides a . Until the early 20th century, economists had been unable to provide a . If a consumer purchases two goods, the budget limitation can be displayed with the help of a budget line on a graph. This cookie is set by GDPR Cookie Consent plugin. As noted above, combination H is not available under food stamp subsidy because food stamps cannot be used to purchase other goods. Thus the food subsidy has induced the individual to consume more food than in case of cash payment. However, his preference for those combined products can be arranged in the order of preference. The preference-maximising point A on indifference curve I 1 shows that . Thus income provides satisfaction indirectly. read more, theory of exchange, etc. On the other hand, in case of good, case of good X in Figure 11.10 the ration limit Rx does not seem to be effective, though it is potentially binding as it truncates his market opportunity set. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc. Privacy Policy3. Several kinds of subsidies are paid to the individuals these days by the Government for promoting welfare of the people. Meaning of Indifference Curve: The indifference curve analysis measures utility ordinally. In short, the first condition of the consumer's equilibrium is that the budget or price line should be tangent to the indifference curve. If the purpose is to increase the consumption of food and therefore provide adequate diet to the people, then food stamp subsidy is better than cash subsidy as under the former, the individual is constrained to buy at least a given quantity of food. Since A is on a higher . These cookies will be stored in your browser only with your consent. Your Mobile number and Email id will not be published. In fact, it would always be so whatever the subsidy and whatever the preferences of consumers so long as only the indifference curves remain convex and smooth. The effect of this subsidy on consumers welfare and money value of this subsidy to the consumer is illustrated in Figure 11.1 where the quantity of food is measured on the X- axis and money on the Y-axis. Leisure time can be used for resting, sleeping, playing, listening to music on radios and television etc. Straight-line indifference curves of perfect substitutes are shown m Fig. A higher indifference curve shows a higher level of satisfaction. Before publishing your Articles on this site, please read the following pages: 1. A glance at panel (b) of Figure 11.18 will reveal that supply curve of labour is upward sloping indicating positive response of the individual to the rise in wage rate. Share Your PPT File. It does not store any personal data. Thus, the consumer will definitely prefer A to B, that is, A will give more satisfaction to the consumer than B. Assumes marginal rate of substitution to diminish. Corporate valuation, Investment Banking, Accounting, CFA Calculation and others (Course Provider - EDUCBA), * Please provide your correct email id. Thus, the slope of the income-leisure curve OM/OT equals the wage rate. This shows that a part of food stamp subsidy is indirectly used to finance the increased consumption of other goods. Prohibited Content 3. Lastly, out of the two possibilities of the effects of food-stamp subsidy and cash subsidy which is the most common result, that is, the most common outcome of the two possible cases presented in Fig. Visitors, bounce rate, traffic source, etc suppose with the introduction rationing... Gdpr cookie consent plugin equilibrium point E2 he is purchasing Of2 quantity of food stamp is. The category `` Functional '' up by the buyers for consumption and not for.. 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