Supply and Demand and Budget Line

TASK 1 Consider the following equation: MRSXY < PX/PY where MRS = marginal rate of substitution x and y are two goods P = price < = is less than {draw:frame} The graph above shown us the indifference curve budget line diagram which explaining the equation MRSXY < P X / PY. There are two ways to measure the consumer preferences or what the consumer wants. The first one is by trying to put a ‘value’ on the satisfaction a consumer obtains from consuming a ‘unit’ of a good. Consumers are assumed to be able measure utility in terms of a ‘util’. However, we cannot find the total utility by using this method. So we can use another way which is by ranking the product. We can say that the consumer is preferred good Y compared to good X. the indifference curve is a curve that shows consumption bundles that give the consumer the same level of satisfaction. So this means that the consumer is satisfied at any point if the indifference curves above. The slope of the indifference curves are downward sloping. For example, the consumer will satisfy when he buys 3 good X and 4 good Y. The meaning of the term budget constraint is what the consumer can afford to buy. The income of the consumer will determine how much he can buy in the market. So, the budget line in the graph above is showing how much good X and Y that the consumer affords to buy. If the slope of the budget line is higher, this means that the consumer afford to buy good X compare to good Y. While if the slope of the budget line is lower, the consumer afford to buy good Y compare to good X. From the graph, we can see that the consumer is not maximizing the satisfaction. This is because the indifference curves are inside the budget line and it intersect at two points which are a and b. At point b, the slope of the indifference curve (MRSxy ) is less than the slope of the budget line (Px/Py). While, at point a, the slope of the indifference curve (MRSxy ) is greater than