A2 Economics – drawing indifference curves

Starting this topic with my A2 classes and below are some hints from past Yr 13 student Wells Yuan about how to draw indifference curves.

Here are some things that may help you understand and memorise them better:

• The substitution effect is always in the opposite direction of the price change regardless of the nature of the product since consumers will switch to purchasing more of the cheaper products.

• The income effect can be interpreted as the change in the purchasing power particular to a good. So the income effect of a normal good is in the opposite direction of the price change. But the income effect of inferior goods and Giffen goods are in the same direction as the price change. (As the price of a particular good decreases, the purchasing power of the budget increases particular to that good. So the income effect for a normal good is positive in this case. But it is negative for inferior goods and Giffen goods. Hence the difference in the directions of the income effect.)

• Therefore, you can remember these directions simply: for a price DECREASE, the substitution effect is always POSITIVE, but the income effect is only positive for normal goods.

• The indifference curves are determined by the nature of the products; the budget lines are determined by the budget of the consumer and the prices of the products.

• Giffen goods are rare because it is uncommon that the income effect is more significant than the substitution effect when there’s a change in price as it would mean to go against the law of demand. So best not to use Giffen goods as a main argument in an essay.

Tips for graphs in an exam:

• Identify the nature of the product and both effects caused by the price change.

• Draw the budget lines first.

• Draw the budget line that represents the substitution effect without the income effect.

• Draw the indifference curves. Make sure that the intersections between the indifference curves and the budget lines are at a tangent. The gap between the indifference curves for a normal good is regular, large for an inferior good, and huge for a Giffen good.

• Don’t forget to label everything! Axis, units, the income and substitution effects, three points of intersection, budget lines, and indifference curves.

• Lastly, refer to the graph and briefly explain it in the essay.

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