A2 Economics – Indifference curves and GIN

With the A2 essay paper coming up here is a note on indifference curves – if you know the theory it is a good essay to do. Remember that most indifference curve questions will have a discussion section that asks for the limitations of such theory.

Last year one student has come up with a novel way of remembering the position of the indifference curve when the price of one good falls. The three types of goods that eventuate from a price fall are: Giffen, Inferior and Normal – GIN.

G – Giffen – price falls negative income effect outweighs the positive substitution effect – point L would then be to the left of point J on the graph below. I – Inferior – price falls positive substitution effect outweighs negative income effect – point L would then be between points J and K N – Normal good – price falls both income and substitution effect are positive – point L will be to the right of point K – as shown below.

Below is a mindmap on indifference curves explaining all the effects of increasing and decreasing prices on different types of goods.

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