Answer to Question #126283 in Microeconomics for nida naz

Question #126283
Explain graphically how indifference curve analysis can be used to derive a demand curve?
1
Expert's answer
2020-07-15T10:23:35-0400

Graphical Explanation of how Indifference Curve Analysis Can be Used to Derive Demand Curve



To derive the demand curve from an indifference curve analysis, we can start by assuming that a consumer’s income is $300 which he or she can spend of goods. Normally, money is plotted on Y-axis whereas while the quantity of good, say good X is plotted on the X-axis. An indifference map of the consumer is then drawn along a couple of budget lines depicting different prices of good X. At initial point, budget line PL1 shows that the price of good X is $15 per unit. As the price of the good X falls further up to $6 the budget lines shifts from PL1 to PL4. The successive budget lines form tangent points with corresponding indifference curves. Upon joining those tangency points we end up with a line called price consumption curve (PCC). The PCC line shows the quantity of good X demanded or purchased at different prices. By extrapolating lines downwards from point Q1, Q2, Q3, and Q4 up to the X-axis on the graph which will contain the demand curve points A, B, C, and D which represents the quantity of good X demanded. The intersection between these lines with different prices $15, $10, $7.5, and $ 6 from the Y-axis we get points K,L,S, and T, which upon joining we derive or obtain the demand curve DD which slopes from left to right, showing that as the price of good X rises, the quantity demanded of good X reduces.



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