Textbook Indifference Curves and Budget Lines

Author:
Marsh
This graph shows an individual's budget curve and a set of indifference curves. Line AB is a budget curve. Click on point B at the bottom and drag it to the right or left. Notice how as you do it becomes tangent with different indifference curves. Since the slope of the budget line reflects the relative prices of biscuits and bananas, as you move point B you are changing the relative price. Each tangent point represents a different combination of biscuits and bananas. So any combination of a budget line and the point where it is tangent to a budget line represents a specific combination of relative price and quantities of bananas and biscuits purchased. If we arbitrarily choose biscuits as our currency and set the price of a biscuit equal to $1, then these points are combinations of price in $ and the quantity of bananas purchased at that price. Using the data from these points, we can construct a second graph, one showing the relation between price and the quantity of bananas purchased at that price. This second graph is the individual's demand curve.