Eco 201 Online Quiz and Discussion (Budget constraint and others)—-6/3/2023

OKEKE ONYINYECHI DANIELLA
2020/249367
Combined social sciences
Economics and political Science

1:The indifference curve is a graphical representation of the consumer’s preferences among different combinations of goods. It is a curve that shows all the combinations of two goods that give the same level of satisfaction or utility to the consumer. The indifference curve is based on the following assumptions:
Rationality: The consumer is rational and aims to maximize their utility by consuming the goods.
Completeness: The consumer can compare and rank all the combinations of goods.
Transitivity: If a consumer prefers combination A to B and B to C, then they must prefer A to C.
Diminishing marginal rate of substitution: As the consumer consumes more of one good, the marginal utility of that good decreases, and the consumer must consume more of the other good to maintain the same level of satisfaction.
The indifference curve has been criticized for its assumptions of rationality and completeness, which may not always hold in real-world situations. The curve is also limited to only two goods, which can limit its applicability.

2:Budget constraint refers to the limit on the amount a consumer can spend on goods and services given their income and the prices of the goods. Utility maximization is the process of choosing the combination of goods that provides the highest level of satisfaction or utility given the budget constraint. The consumer must allocate their income among the different goods to maximize their utility.
The consumer can determine the optimal combination of goods by comparing the marginal utility of each good to its price. The marginal utility measures the additional utility gained from consuming an extra unit of the good, while the price represents the opportunity cost of consuming that good. The consumer maximizes their utility by consuming the goods that provide the most marginal utility per dollar.

3:The Cobweb theory is an economic theory that explains the cyclical behavior of prices and quantities in certain markets, such as agricultural markets. The theory is based on the following assumptions:
There is a time lag between the decision to produce a good and its actual production.
The supply of the good is fixed in the short run.
The demand for the good is relatively inelastic.
The theory predicts that if there is an initial increase in the price of the good, producers will respond by increasing their production in the following period. However, because of the time lag between the decision to produce and actual production, the supply will be higher than the demand, leading to a decrease in the price in the next period. This, in turn, will lead to a decrease in production, resulting in a shortage in the following period, and so on. The cycle will continue until the market reaches an equilibrium.

The Cobweb theory has been criticized for its assumptions, which may not always hold in real-world situations. The theory also does not account for the possibility of changes in demand or technological innovations that can affect the supply of the good.

KIWAMU FAVOUR CHIZARAM
2020/242601
Economics Major
An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.An indifference curve can also be defined as a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—when it comes to having any combination between the two items that is shown along the curve.
ASSUMPTIONS OF AN INDIFFERENCE CURVE.
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
The consumer is expected to buy any of the two commodities in a combination.
Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
The consumer behavior remains constant in the analysis.
The utility is expressed in terms of ordinal numbers.
Assumes marginal rate of substitution to diminish.
CRITICISMS OF THE INDIFFERENCE CURVE
Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior.For example, consumer preferences might change between two different points in time, rendering specific indifference curves practically useless. Other critics note that it is theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points.
BUDGET CONSTRAINT
The budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. It can also be defined as the total amount of items you can afford within a particular budget
UTILITY MAXIMIZATION
Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions. Utility function measures the intensity to which an individual’s fulfillment is met.

COBWEB THEORY
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather
ASSUMPTIONS OF COBWEB THEORY
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
In this theory, the market could fluctuate between high price and low price as suppliers respond to past prices.
LIMITATIONS OF COBWEB THEORY
Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

NAME: Ugwu chiamaka Emmanuella
REG NO: 2016/237754
DEPARTMENT: Science Laboratory Technology

THE INDIFFERENCE CURVE THEORY
“An indifference schedule is a list of combinations of two commodities the list being so arranged that a consumer is indifferent to the combinations, preferring none of any other”. Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget.
ASSUMPTIONS OF THE INDIFFERENCE CURVE ANALYSIS.
It retains some of the assumptions of the cardinal theory, rejects. others and formulates its own. The assumptions of the ordinal theory are as follows.
The consumer act rationally so as to maximize satisfaction.
There are two goods X and Y
The consumer possesses complete information about the prices of goods in the market.
The prices of the two goods are given.
The consumer’s taste, habits and income remain the same through out the analysis.
The consumer arranges the that goods in a scale of preference. which means that he has both ‘preference’ and ‘indifference’ for the goods.
CRITICISMS OF INDIFFERENCE CURVE ANALYSIS.
The indifference curve analysis is no doubt regarded superior to the utility analysis but critics are not lacking in denouncing it. The main points or criticism are discussed below
Old come in New Bottle: Prof. Roberton does not find anything news in the indifference curve technique and regards it simply as “the old wine in a new bottle”. It substitutes the concept of preference for utility replaces introspective cardinalism by introspective ordinalism (instead of cardinal numbers such as 1, 2, 3, etc, ordinal numbers I, ii, iii etc are used to indicate consumer preferences).
Away from reality: According to Prof. Robertson: “The fact that the indifference hypothesis is more complicated of the two Psychologically (with regards to the assertion that the indifference Curve technique is superior to the cardinal utility analysis), happens to be more economical logically expands no guarantee that it is nearer to the truth”.
Indifference curves are non-transitive. One of the greatest critics of the indifference Hypothesis is W.E. Armstrong who Argued that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations.

MEANING OF BUDGET CONSTRAINTS

In Simple form budget Constraints is the limit of a consumer’s spending. A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference map as tools to examine the parameters of consumer choices . Both concepts have a ready graphical representation in the two-good case. The consumer can only purchase as much as their income will allow, hence they are constrained by their budget. The equation of a budget constraint is += where Pox is the price of good X, and Poy is the price of good Y, and m = income.

UTILITY MAXIMIZATION
This is also known as consumer equilibrium. It is a point where a consumer derives maximum satisfaction when his or her marginal utility equates the price of the commodity. At this point, marginal unity is equal to zero.
Thus; Mux = Pricex = 0
Utility maximization is the attainment of the greatest possible total utility. While consumers would want to attain maximum utility, they are constrained by the available income and the prices of the goods.
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.

COBWEB THEOREM.
Cobweb theorem is a generic name for a theory of cyclical fluctuations in the prices and quantities of various agricultural commodities -fluctuation which arise because for certain agricultural products:
(i) The quantity demanded of the commodity at any given time depends on its price at that time, whereas
(ii) The quantity supplied at any given time depends on its price at a previous time when production plans were initially formulated. Furthermore, this is where planting must precede by an appreciable length of time the harvesting and sale of the output. The prices of agricultural commodities can fluctuate because of unplanned variations in supply and because of the difficulty of altering this supply in the short period. In the case of certain products, this difficulty of adjusting supply to demand appears capable of producing cyclical fluctuation in prices.
We can illustrate how this can occur as follows:
Let us suppose that producers base their decisions on how much to “plant” on the price currently reigning in the market. If the present price is high, they will be encouraged to invest or plant more, and vice versa. There plantings cannot however com straight on to the market, but become available only at the end of the period needed for growth, after the crop has been harvested and transported to the market.
We can assume that this takes a given amount of time, which we can call the “period”. Thus the price reigning in a given the next period. If it represents the amount supplied in period t, then Sț= S(Pț -1)= lagged supply denotes that the value of S, depends on the price reigning in period (t-1) just preceding it. The demand curve on the other land hand is specified in the normal way the amount bought depending on the current price is so that Dț= D(Pț).
Equilibrium would be given where the amount currently put on the market equals the amount demanded. Sț=Dț. The Cobweb cycle. Convergent oscillation of price and quantity.

Okechukwu Mary Chisom
2020/246373
Combined social science (Eco/soc)
1.Whats an indifference curve?
An indifference curve is a graphical representation of various combinations of two goods , such that a consumer is indifferent between any of them. The curve shows all the possible combinations of goods that yield equal satisfaction or utility to the consumer. Indifference curves generally slope downward from left to right, illustrating the principle of diminishing marginal utility.

The assumptions
1.Transitivity: If a consumer prefers Bundle A to Bundle B, and Bundle B to Bundle C, then the consumer will also prefer Bundle A to Bundle C.
2.Completeness: A consumer has a clear preference between any two bundles of goods, which means the consumer can compare any two bundles and determine which one they prefer or if they are indifferent between them.

Criticisms of indifference curves
1.is that they rely on the assumption that consumers can compare the utility or satisfaction they get from different combinations of goods. However, utility is not directly observable, and some critics argue that it is impossible to know whether a consumer really views a bundle of goods as equal to another.
2. criticism of indifference curves is that they may not always accurately reflect consumer behavior. For example, they may not account for changing preferences over time, or for cases where goods are complementary (meaning the consumption of one good increases the value of the other) or substitutable (meaning one good can be used in place of another).

Overall, while indifference curves can provide a useful tool for analyzing consumer behavior and decision-making, they come with certain assumptions and limitations that must be taken into account.
Budget constraint and utility maximization are key concepts in microeconomics that relate to the decisions that consumers make when purchasing goods and services.

2.A budget constraint is essentially a limit on the amount of money a consumer can spend on a combination of goods and services, given their income and the prices of those goods and services. It is typically represented using an equation in terms of prices and quantities, where the total amount spent cannot exceed the consumer’s income:
P1Q1 + P2Q2 + … + PnQn ≤ I
Here, P1, P2, …, Pn are the prices of the n goods, Q1, Q2, …, Qn are the corresponding quantities consumed, and I is the consumer’s income.
Utility maximization, on the other hand, is the process by which consumers choose the combination of goods and services that gives them the highest possible level of satisfaction, or utility, subject to the budget constraint. This is typically represented using indifference curves, which show all the combinations of two goods that provide the same level of utility to the consumer. The optimal combination of goods is the one where the highest possible level of satisfaction is achieved, while still staying within the budget constraint.
Overall, the concepts of budget constraint and utility maximization are important in helping us understand how consumers make choices and optimize their spending patterns.

3. The Cobweb Theory is a dynamic analysis theory that is used to explain the fluctuations in some commodity markets with long lags between production and sale . The theory suggests that under certain conditions, the market equilibrium for a commodity can be unstable and can exhibit oscillatory behavior over time. The Cobweb Theory is based on the idea that producers make production decisions based on the current market price of the commodity, which in turn affects the supply of the commodity in the market. However, since there is a lag between the time producers make production decisions and the time the commodity is available in the market, the supply of the commodity may not match the demand for it.
There are many variations of the Cobweb Theory, but a basic version assumes that the supply of a commodity in a market is determined by the production decisions of producers in the previous period, while the demand for the commodity is determined by market conditions and consumer behavior. In this scenario, the price of the commodity in the current period is determined by the intersection of the supply and demand curves, and producers use this price to make production decisions in the next period.
One of the key features of the Cobweb Theory is that it can generate cyclical or oscillatory behavior in the market. For instance, in a market where producers tend to overreact to prices and quickly adjust their production to changes in the market, the market can exhibit regular boom and bust cycles. Alternatively, in a market where producers tend to underreact to prices, the market may exhibit damped oscillations, where the oscillations gradually die out over time.
While the Cobweb Theory has been widely studied and applied in different fields, it has also been criticized for its assumptions and limitations. For instance, the theory assumes that producers have perfect information and make rational decisions based on this information. In reality, producers may have limited information or may make decisions based on other factors, such as political or personal considerations. Nonetheless, the Cobweb Theory provides a useful framework for analyzing the behavior of markets with long lags between production and sale.

NAME: Akubue AbleGod Akachukwu
REG. NO.: 2020/242574
DEPT. : ECONOMICS
1. THE INDIFFERENCE CURVE (Assumptions and Criticisms).
An indifference curve is the one which shows the possible combination of two commodities, each yielding the same satisfaction or utility to the consumer. It can also be defined as a curve that shows a combination of two goods X and Y in various quantities that provides equal satisfaction (utility) to an individual. In economics, it is used to define the point where individuals have no particular preference for either one good or another based on their relative quantity These curves are heuristic devices used to used in contemporary microeconomics to demonstrate consumer preference and the limitations to a budget.
*ASSUMPTIONS OF INDIFFERENCE CURVE
I. The consumer acts rationality so as to maximize satisfaction.
II. There are two goods X and Y.
III. The consumer possess complete information about the prices of the goods in the market.
IV. The prices of the two goods are given.
V. The curve is always convex to the origin.
VI. The consumer is in a position to order all possible combination of the two goods.
*CRITICISMS OF INDIFFERENCE CURVE
I. Old wine in new bottle: That’s it simply substitutes the concept of preference for utility, marginal utility by marginal rate of substitution.
II. Away from reality: according to Prof. Robertson, it said with regards to the assertion that the indifference curve technique is superior to the cardinal utility analysis, claims it is more economical logically affords no guarantee that it was nearer to the truth.
III. Midway house: Indifference curves are hypothetical because they are not subject to direct measurements.
IV. Knight argus that the observed market behavior behavior of the consumer can not be explained objectively with the help of the in difference curve analysis.
V. The indifference curve analysis becomes ridiculous when it is assumed that the goods are divisible into small units.

2i.BUDGET CONSTRAINT
It simply shows What the consumer can afford.most people would like to increase the quantity and quality of goods they consume, but household’s consumption choices are limited by the household’s income and by the prices of goods and services available. The constraint to a household’s consumption choices are described by the budget constraint or budget line.
II.UTILITY MAXIMIZATION
It’s also known as consumer equilibrium. It’s a point where a consumer derives maximum satisfaction when his or her marginal utility equates the price of the commodity. At this point marginal utility equates to zero.
Thus ; MUx = PRICE x = 0
It’s one of the attainment of the greatest possible utility.while consumers will want to attain maximum utility, they are constrained by the available income and prices of the goods.
3. COBWEB THEORY
It’s an economic model that explains why price might be subject to periodic fluctuations in certain types of markets. It explains cyclical supply and demand in a market where the amount produced must be selected before prices are watched closely. This model was analysed by Nicholas kaldor in 1934. Coining the term” cobweb theorem” .(see kaldor 1938 and pashigian 2008). Citing analysis in German by Henry Schultz and Umberto Ricci.
This theory is the ideal that price fluctuations can lead to fluctuations in supply which causes a cycle of rising and falling prices. It is mostly used in farming sector, This model can explain the fluctuations in the supply and demand balance of some mass produced products with Long production cycles.
* CRITICISMS OF COBWEB TTHEORY
I. This theorem assumes that output is solely governed by price , Thus it is an Unrealistic assumption.
II It’s not strictly a trade cycle theorem for it is concerned only with the farming sector.
III. It’s based upon the unsound assumption that the cross which farmers plants in 2008 depends solely on the prices ruling in 2007, as a matter of fact it is contrary, when 2007 prices undoubtedly influence decisions regarding 2008 crops , producers are also influenced by their expectations.
*SUMMARY
In spite of it’s shortcomings, cobweb model is important aside it’s applications in the cyclical behaviour of wheat and other agricultural products’ markets. It focuses attention on the important fact that the present events depend upon the past occurrences. It entails us to use the technique to demonstrate the process of change over time.

Indifference Curve?
An indifference curve is a contour line where utility remains constant across all points on the line. In economics, an indifference curve is a line drawn between different consumption bundles, on a graph charting the quantity of good A consumed versus the quantity of good B consumed. At each of the consumption bundles, the individual is said to be indifferent.
Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The graph shows a combination of two goods that the consumer consumes.
The above diagram shows the U indifference curve showing bundles of goods A and B. To the consumer, bundle A and B are the same as both of them give him the equal satisfaction. In other words, point A gives as much utility as point B to the individual. The consumer will be satisfied at any point along the curve assuming that other things are constant.
Assumption of indifference curve:
(1) The prices of the two goods are given.
(2) The consumer’s tastes, habits and income remain the same throughout the analysis.
(3) He prefers more of X to less of У or more of Y to less of X.
(4) An indifference curve is negatively inclined sloping downward
(5) An indifference curve is always convex to the origin.
(6) An indifference curve is smooth and continuous which means that the two goods are highly divisible and those levels of satisfaction also change in a continuous manner.
(7) The consumer arranges the two goods in a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods. He is supposed to rank them in his order of preference and can state if he prefers one combination to the other or is indifferent between them.
(8) Both preference and indifference are transitive. It means that if combination A is preferable to В, and В to C, then A is preferable to C. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C. This is an important assumption for making consistent choices among a large number of combinations.
(9) The consumer is in a position to order all possible combinations of the two goods.
Critics of indifferent curve;
(1) Cardinal Measurement implicit in l.C. Technique:
Prof. Robertson further points out that the cardinal measurement of utility is implicit in the indifference hypothesis when we analyse substitutes and complements. It is assumed in their case that the consumer is capable of regarding a change in one situation to be preferable to another change in another situation. To explain it, Robertson takes three situations A, В and C, as shown in Figure I2.38. Suppose the consumer compares one change in situation AB with another change in situation BC.
He prefers the change AB more highly than the change BC. If another point D is taken, then he prefers the change AD as highly as the change DC. This, according to Robertson, is equivalent to saying that the space AC is twice the space AD and we are back in the world of cardinal measurement of utility. Thus when changes in two situations are compared as in the case of substitutes and complements, it leads to the cardinal measurement of utility.

(2) Midway House:
Indifference curves are hypothetical because they are not subject to direct measurements. Although consumer choices are grouped in combinations on the ordinal scale, no operational method has been devised so far to measure the exact shape of an indifference curve. This stems from the fact that ‘the peculiar logical structure of the theory has low empiric content.’ The failure of Hicks to present a scientific approach to the consumer’s behaviour led Schumpeter to characterize the indifference analysis as a ‘midway house;’. He remarked: “From a practical standpoint we are not much better off when drawing purely imaginary indifference curves than we are when speaking of purely imaginary utility functions.”

(3) Fails to Explain the Observed Behaviour of the Consumer:
Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation. In fact, what we observe is the composite price effect. Similarly, the theory of complementaries and substitutes based on the principle of marginal rate of substitution cannot be discovered from the market data. Samuelson has explained the observed behaviour of the consumer in his Revealed Preference Theory.
(4) Indifference Curves are Non-transitive:
One of the greatest critics of the indifference hypothesis is W.E. Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations. He further opines that any two points on an indifference curve are the points of indifference not because they are of iso-utility but of zero-utility difference.
It is only when utility difference is zero that the relation between any two or more points on an indifference curve is symmetrical. Armstrong’s arguments can be explained with the help of Figure 12.39 where on I1 curve points P, Q, R and S represent different combinations of the goods X and Y. The points P and Q, R and S are so drawn that the difference between each pair is imperceptable.
2.Definition of Budget constraints
A budget constraint occurs when a consumer is limited in consumption patterns by a certain income.When looking at the demand schedule we often consider effective demand. Effective demand is what people are actually able to spend given their limitations of income.
Temporary budget constraints can be overcome by borrowing, but in the long term budget constraints are determined by income such as rent and wages.
(i ) Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.
For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction.
Utility maximisation can also refer to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time.
3.Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
cobweb-theory
If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
If supply is reduced, then this will cause the price to rise.
If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Indifference curve:
An indifference curve shows the combination between two goods in various quantities as provides equal satisfaction for an individual
Assumptions:
. Prices of goods are constant
.consumer spend a small part of their income
.marginal rate of substation diminishes
.there is possibility of changing another goods but there is no perfect substitute
Criticism:
.Indifference curve is said to make unrealistic assumptions about human behavior
.it is unable to explain the risky choices undertaken by the consumer

Name: Kalu Favour Enyindiya
Reg number: 2020/249472
1. *INDIFFERENCE CURVE (Assumptions and Criticism)*
An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.
The indifference curve in economics examines demand patterns for commodity combinations, budget constraints and helps understand customer preferences. The theory applies to welfare economics and microeconomics, such as consumer and producer equilibrium, measurement of consumer surplus, theory of exchange, etc.
Indifference Curve Assumptions:
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
The consumer is expected to buy any of the two commodities in a combination.Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
The consumer behavior remains constant in the analysis.
The utility is expressed in terms of ordinal numbers. Assumes marginal rate of substitution to diminish.
Indifference Curve Criticism:
Indifference curve is said to make unrealistic assumptions about human behaviour. It is unable to explain risky choices undertaken by the consumer. It has been criticized for being an ‘old wine in a new bottle’ for it has merely rehashed the concept of diminishing marginal utility of a product in new terms.

2. BUDGET CONSTRAINT AND UTILITY MAXIMIZATION
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.

How do budget constraints work?
When calculating budget constraints, you normally have a number of things under consideration for which you are trying to budget. However, it’s easier to understand how budget constraints work if you just consider two sets of items. You could spend your entire budget on item one, or you could spend it all on item two. Alternatively, you could buy a combination of some of item one and some of item two. The proportions of each item you purchase would be constrained by your budget
UTILITY MAXIMIZATION
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.

Understanding Utility Maximization
The combination of goods or services that maximize utility is determined by comparing the marginal utility of two choices and finding the alternative with the highest total utility within the budget limit. The decision is influenced by the option that produces a higher level of satisfaction. This explains how companies and individuals develop consumption habits.
The consumer may consider purchasing more of one item and less of another. Through maximizing utility, the consumer will buy an item that produces the greatest marginal utility with the least amount of spending.

Total Utility Maximization
Total utility refers to the total amount of satisfaction that a person obtains by consuming a specific quantity of units of a product at a given time. The greater the consumer’s total utility, the higher the measure of satisfaction acquired.

Marginal Utility Maximization
Marginal utility refers to the additional satisfaction that a consumer achieves from utilizing one additional item. For example, if the utility of consuming the first cake is ten utils and eight utils for the second cake, the marginal utility of consuming the second cake is eight utils. If two utils are assigned to the utility of the third cake, then the marginal utility of consuming the third cake is two utils.

3. COBWEB THEORY
The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers’ expectations about prices are assumed to be based on observations of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term “cobweb theorem” (see Kaldor, 1938 and Pashigian, 2008), citing previous analyses in German by Henry Schultz and Umberto Ricci.
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Cobweb theory has played an essential role incorporating both features as explanations for endogeneity of price and production cycles in commodity markets. Empirical testing of cobweb models explored the possibility that “short run” supply and demand elasticities could produce temporary market instability.
The cobweb model can explain the fluctuations in the supply and demand balance of some mass-produced products with long production cycles. The production and consumption of these products have the following characteristics. Information is transmitted from the consumer end to the production end.

Criticism of Cobweb Theory:
Like all other theories of trade cycle, the Cobweb Theory too suffers from some severe limitations:
(1) This is not strictly a trade cycle theorem for it is concerned only with the farming sector. There are a good many others sphere of production where it says nothing.
(2) This theorem assumes that the output is solely governed by price. Thus is unrealistic assumption. The fact is that the output particularly of farm products is determined not only by price, but by several other factors—weather, prices of the factors of production
(3) The theory is based upon the unsound assumption that the crop which farmer plants in 2008 depends solely on the prices ruling in 2007. As a matter of fact this is contrary to facts. When 2007 prices undoubtedly influence decisions regarding 2008 crops, producers are also influenced by their expectations. Producer’s decisions with regard production during any given period depend not only upon the backward look but also on the forward guess. If this year’s price is high, producers are apt to foresee some reaction to the high price and anticipate larger output by their competitors next year.

Conclusion to Cobweb Theory:
We conclude that in spite of its shortcomings the Cobweb Theory is important besides its application as an explanation for the cyclical behaviour of wheat and other agricultural products’ markets. It concentrates attention on the important fact that the present events depend upon the past happenings It furnishes us with a technique to demonstrate the process of change over time.

Name: Sunday Linus
Reg. Number: 2019/250066
Email: linussunday0@gmail.com
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OGUANYA CHIDERA FAITH
2020/242638
ECONOMICS DEPT

1. Indifference curve is said to make unrealistic assumptions about human behaviour. It is unable to explain risky choices undertaken by the consumer. It has been criticized for being an ‘old wine in a new bottle’ for it has merely rehashed the concept of diminishing marginal utility of a product in new terms.
An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.

The indifference curve in economics examines demand patterns for commodity combinations, budget constraints and helps understand customer preferences. The theory applies to welfare economics and microeconomics
, such as consumer and producer equilibrium, measurement of consumer surplus
, theory of exchange, etc.Indifference Curve Assumptions
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice. The consumer is expected to buy any of the two commodities in a combination. Consumers can rank a combination of commodities based on their satisfaction levels.

2.The budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.
Utility is an economic concept denoting consumers’ benefit or satisfaction from goods or services. According to economic theories on rational choice, consumers always seek to maximize their utility.

It is important to understand what maximum utility is because it influences the price and demand of commodities and services. Utility is the extent to which an economic good or service satisfies the consumer’s needs. In other words, economic utility is the usefulness of the product or service. It is practically impossible to quantify a consumer’s utility or benefit in economics. Analysts indirectly estimate product or service utility using specific economic models.

3. The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.Cobweb theory is the idea that price fluctuation can lead to fluctuations in supply which cause a cycle of raising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors,such as the weather.Cobweb theory has played an essential role incorporating both features as explanations for endogeneity of price and production cycles in commodity markets. Empirical testing of cobweb models explored the possibility that “short run” supply and demand elasticities could produce temporary market instability.Inadvertently” (Samuelson [1947]) Moore sets out the cobweb idea which mathematical formalization was given by Ricci, Schultz and Tinbergen.
Spider webs are called cobwebs because the old English word for spider was coppe. Turns out that cobwebs are only produced by Theridiidae (cobweb spiders) and Linyphiidae (money spiders) – all others should be just known as spider webs..

WEAKNESSES OF COBWEB THEORY1.It assumes that products (former) are irrational and hence base their production decisionon the previous prices without thinking of price changes but this is rather unrealisticbecause in reality farmers always think about changes in prices in the future.It concentrates attention on the important fact that the present events depend upon the past happenings It furnishes us with a technique to demonstrate the process of change over time.

1.What Is an Indifference Curve?
An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied.

Assumptions of indifference curve:

a. Rationality: The consumer assumes to be rational. So the consumer aims to maximize utility by consuming commodities, given his income and prices of goods.

b. Utility is ordinal.
The utility is ordinal means that consumers can rank or order the various baskets of commodities based on each basket’s satisfaction or utility.
C. The diminishing marginal rate of substitution.
Indifference curve analysis is based on the axiom of diminishing marginal rate of substitution. Suppose that a consumer consumes two commodities, say X and Y. From a combination of the commodities, he gets a certain level of utility or satisfaction.

If he decided to cut down the quantity of one commodity and keep the utility level unchanged, he should substitute some units from the other commodity.

Criticisms
1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.
B. All Commodities are not Divisible:

The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radios, etc. are indivisible. To have 3½ watches or 2½ cars or 1½ radios in any combination is unrealistic. When indivisible goods are taken in a combination, they cannot be substituted without dividing them. Thus the consumer cannot get maximum satisfaction from the use of indivisible goods.

No 2:

Budget constraints are defined as when a consumer’s consumption patterns are restricted by a certain income.

We frequently take into account effective demand when examining the demand schedule. Powerful interest individuals are really ready to spend given their constraints of pay.

Borrowing can help with short-term budget constraints, but long-term budget constraints are determined by income like rent and wages.

A budget constraint occurs when a consumer’s income restricts their consumption habits. To put it another way, it refers to all of the various combinations of products and services that consumers are able to purchase in light of the specific income they have and the prices they are currently paying for those products and services.

The use of loans can help alleviate short-term budget constraints; However, in the long run, budget constraints are primarily governed by income, rent, and other more long-term factors, according to analysis.

Financial plan imperative is the essential piece of the idea of utility expansion. The following question can summarize this idea: What inexpensive set of goods and services will make me happy? Here, the word “affordable” refers to a limited budget. In the meantime, indifference curves are linked to “happiness.”

UTILITY MAXIMIZATION

The idea that people and businesses should try to get the most satisfaction out of their economic decisions is known as utility maximization
.

For instance, while choosing how to spend a decent some, people will buy the mix of products/benefits that give the most fulfillment.

The term “utility maximization” can also be used to describe other choices, such as the best number of hours for workers to work. Income rises as a result of more work, but leisure time decreases.

In classical economics, the idea of maximizing utility is very important. It emerged from the utilitarian philosophers John Stuart Mill and Jeremy Bentham. Alfred Marshall and other early economists introduced utility maximization into economic theory.

No 3:

Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory
* In an agricultural market, farmers have to decide how much toproduce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
* A key determinant of supply will be the price from the previous year.
* A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
* Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)

1. If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
2. However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
3. If supply is reduced, then this will cause the price to rise.
4. If farmers see high prices (andhigh profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Cobweb theory and price divergence

Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)
If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

Cobweb theory and price convergence
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium

Limitations of Cobweb theory
Rational expectations. The modelassumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factorsBuffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus.

An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility.
In economics, an indifference curve is a curve that shows the combination of two goods that give a consumer equivalent satisfaction and utility.
ASSUMPTIONS
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
The diminishing marginal rate of substitution
Total utility of the consumer depends on the amount of the commodities consumed.
Consistency and transitivity of choice
CRITICISMS
Rationality.
The consumer assumes to be rational. So the consumer aims to maximize utility by consuming commodities, given his income and prices of goods.
Utility is ordinal.
The utility is ordinal means that consumers can rank or order the various baskets of commodities based on each basket’s satisfaction or utility.
The diminishing marginal rate of substitution.
Indifference curve analysis is based on the axiom of diminishing marginal rate of substitution. Suppose that a consumer consumes two commodities, say X and Y. From a combination of the commodities, he gets a certain level of utility or satisfaction.

Budget constraint is the total amount of items you can afford within a current budget.
economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.

Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.
In microeconomics, the utility maximization problem is the problem consumers face: “How should I spend my money in order to maximize my utility?” It is a type of optimal decision problem.

The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets.
The producers of agricultural goods, for instance, might decide to increase their output one year because their product commanded a very high price the previous year. This, however, might lead to overproduction and cause prices to slump that year, thus leading to losses.

Mmaduako Benedict
Business Education
2019/246562
1.Indifference curve
An indifference curve is a locus of all combinations of two goods which yield the same level of satisfaction (utility) to the consumers.
Since any combination of the two goods on an indifference curve gives equal level of satisfaction, the consumer is indifferent to any combination he consumes. Thus, an indifference curve is also known as ‘equal satisfaction curve’ or ‘iso-utility curve’.
Assumptions of indifference curve
The indifference curve theory is based on few assumptions. These assumptions are:
Two commodities
It is assumed that the consumer has fixed amount of money, all of which is to be spent only on two goods. It is also assumed that prices of both the commodities are constant.
Non satiety
Satiety means saturation. And, indifference curve theory assumes that the consumer has not reached the point of satiety. It implies that the consumer still has the willingness to consume more of both the goods. The consumer always tends to move to a higher indifference curve seeking for higher satisfaction.
Ordinal utility
According to this theory, utility is a psychological phenomenon and thus it is unquantifiable. However, the theory assumes that a consumer can express utility in terms of rank. Consumer can rank his/her preferences on the basis of satisfaction yielded from each combination of goods.
Diminishing marginal rate of substitution
Marginal rate of substitution may be defined as the amount of a commodity that a consumer is willing to trade off for another commodity, as long as the usecond commodity provides same level of utility as the first one. And, diminishing marginal rate of substitution states that the rate by which a person substitutes X for Y diminishes more and more with each successive substitution of X for Y. As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin.
2.
Short note on budget constraints and utility maximization
The budget constraint is the first piece of the utility maximization framework—or how consumers get the most value out of their money—and it describes all of the combinations of goods and the budget constraint represents all of the points where the consumer is spending all of their income. Therefore, points between the budget constraint and the origin are points where the consumer is not spending all of their income (i.e. is spending less than their income) and points farther from the origin than the budget constraint are unaffordable to the consumer.

Name: Mpama Onyinyechi Ada
course: Eco 201
Reg no; 2020/245072
Department: Economics
Answer to no (1).

What is an Indifference Curve?
An indifference curve is a graphical representation of a combination of two goods that offers the consumer equal satisfaction on consumption, thereby making the consumer indifferent. The consumer derives the same utility along the curve, for any combination. The concept of indifference curve was developed by British Economist Francis Y Edgeworth. It is a tool of microeconomics to demonstrate consumer preferences and the limitations of budget. Indifference curve analysis assumes that all other variables are constant and stable. The slope of the indifference curve is known are the marginal rate of substitution. The marginal rate of substitution is the rate at which the consumer is willing to give up one good for another.

Assumptions of indifference curve
(1) indifference curves can never cross
(2) the farther out an indifference curve lies, the higher the utility it indicates
(3) indifference curves always slope downwards.
(4) indifference curves are convex.
Among these few I mentioned there are still other assumptions but the one’s outline above are the main one’s.

criticism of indifference curve
1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.
The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.

2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”
This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etcsatisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.
Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.

3. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.
To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.

4. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.

5. Docs not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.
The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.

The indifference curve analysis measures utility ordinally. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say X and Y. An indifferent curve is drawn from the indifference schedule of the consumer. The latter shows the various combinations of the two commodities such that the consumer is indifferent to those combinations
ASSUMPTIONS
The consumer acts rationally so as to maximise satisfaction.
There are two goods X and Y
An indifference curve is smooth and continuous which means that the two goods are highly divisible and that level of satisfaction also change in a continuous manner.
CRITICISMS
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectations.

Cobweb theory is the subjective fluctuations of price in the market.
Moore sets out the cobweb idea which mathematical formalization was given by Ricci, Schultz and Tinbergen.
Cobweb theory has played an essential role in incorporating both features as explanations for endogenity of price and production cycles in commodity markets.

Budget constraint is the boundary of the opportunity set all possible combinations of consumption that someone can afford given the prices of goods and services and the individuals income.
A budget constraint occurs when a consumer is limited in consumption patterns by a certain income.
Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
It is an example of a consumer decides to purchase more of product A and less of product B because the combination guarantees more benefit.
In economics, utility theory governs individual decision making.

Ugwuoke mmesoma Joy
2020/242343
Business education
200l
1. Indifference curve is a curve showing two good that has equal satisfaction to an individual one derive from consuming a given commodity. A consumer’s preference can be represented by indifference curve. A higher indifference curve represents a higher level of satisfaction than a lower one. Therefore a consumer prefers points on a higher indifference curve to points on a lower indifference curve. Indifference curve are negatively sloped, cannot intersect and are convex to the origin. The slope of indifference curve at any point is the consumer’s marginal rate of substitution (MRS)
Assumption of indifference curve
It assumes that consumers act rationally to maximize satisfaction.
It assumes two groups X and Y.
It assumes that the information is complete.
It assumes that the consumer’s taste, habit and income remain the same through the analysis.
Criticism of indifference curve
It is negative and downward sloping.
Assumptions of the analysis are unrealistic.
It has a weak ordering analysis.
It doesn’t take into account the risk of the choices.
Budget constraints shows the possible combinations of different goods the consumer can buy given his or her income and the prices of the good. Changes in income and changes in prices produce changes in the budget constraint. The slope of the budget constraint equals the relative price of the two goods.
Utility maximization
The objective of the consumer is to maximize his or her utility. The constraint in consuming as much as one would want and therefore in having as much utility or satisfaction as possible are the consumer’s level of income and the prices of goods to be consumed. Changes in prices and income therefore will affect the income allocation and goods combination that maximize consumer’s utility.
Cobweb theory
It is an economic theory that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand In a market where the amount produced must be chosen before prices are observed. It is idea that price fluctuations can lead to fluctuation in supply which cause a cycle of rising and falling. Cobweb theory is also known as cobweb model.

Name: Onyemaechi Chiemerie Justice
Reg No: 2020/248274
Department: Business education
Email: emmytex332@gmail.com

1. An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent. Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility
Indifference curve assumptions
• The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
• The consumer is expected to buy any of the two commodities in a combination.
• Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
• The consumer behavior remains constant in the analysis.
• The utility is expressed in terms of ordinal numbers.
• Assumes marginal rate of substitution to diminish
Indifference curve Criticism
Fails to Explain the Observed Behaviour of the Consumer:
Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation. In fact, what we observe is the composite price effect. Similarly, the theory of complementaries and substitutes based on the principle of marginal rate of substitution cannot be discovered from the market data. Samuelson has explained the observed behaviour of the consumer in his Revealed Preference Theory.
Indifference Curves are Non-transitive:
One of the greatest critics of the indifference hypothesis is W.E. Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations. He further opines that any two points on an indifference curve are the points of indifference not because they are of iso-utility but of zero-utility difference.
It is only when utility difference is zero that the relation between any two or more points on an indifference curve is symmetrical. Armstrong’s arguments can be explained with the help of Figure 12.39 where on I1 curve points P, Q, R and S represent different combinations of the goods X and Y. The points P and Q, R and S are so drawn that the difference between each pair is imperceptible.

Points P and Q or R and S will be of iso-utility only if utility difference between them is zero. But the consumer cannot be indifferent between P and R because the difference of total utility between P and R is perceptible. So the consumer will prefer P to R, or R to P in the reverse case. This shows that the points on an indifference curve are not transitive.”If indifference is not transitive”, observes Armstrong, “the text book diagrams with their masses of non-intersecting indifference curves do not make sense.” Thus the very notion of ‘indifference’ appears to be of doubtful validity.
The Consumer is not Rational:
The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.
Combinations are not based on any Principle:
Since the combinations are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not possess any significance for the consumer.
Limited Analysis of Consumer’s Behaviour:
Further, the assumption that the consumer buys more units of the same good when its price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of “conspicuous consumption” and wants to display or to have variety. Changes in the tastes of the consumer or his indulging in speculative purchases also affects his preference for the goods. These exceptions make the indifference analysis a limited study of consumer behaviour.
Failure to consider some other Factors concerning Consumer Behaviour:
The indifference curve analysis does not consider speculative demand, interdependence of the preferences of consumers in the form of snob, Veblen and Bandwagon effects, the effects of advertising, of stocks, etc.

2. budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference map as tools to examine the parameters of consumer choices . Both concepts have a ready graphical representation in the two-good case. The consumer can only purchase as much as their income will allow, hence they are constrained by their budget. The equation of a budget constraint is where is the price of good X, and is the price of good Y, and m is income.

Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.
The concept of utility maximization was developed by the utilitarian philosophers Jeremy Bentham and John Stuart Mill. It was incorporated into economics by English economist Alfred Marshall. An assumption in classical economics is that the cost of a product that a consumer is willing to pay is an approximation of the maximum utility that they receive from the purchased good.

3. Cobweb theorem
The cobweb theorem is an economic model used to explain how small economic shocks can become amplified by the behaviour of producers. The amplification is, essentially, the result of information failure, where producers base their current output on the average price they obtain in the market during the previous year. This is, to some extent, a non-rational decision, given that a supply side shock between planting and harvesting (such as an unexpectedly good or bad harvest) can lead to an unexpectedly lower or higher price. This results in either a higher output or a lower output in subsequent years, and moves the market into a long-term disequilibrium position.

EGWIM CHINONSO THERESA
2020/242593
Economics department
egwimtheresa2@gmail.com

WHAT IS AN INDIFFERENCE CURVE?
An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.

Description: Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The graph shows a combination of two goods that the consumer consumes.

For example,the graph shows the indifference curve showing bundles of goods A and B. To the consumer, bundle A and B are the same as both of them give him the equal satisfaction. In other words, point A gives as much utility as point B to the individual. The consumer will be satisfied at any point along the curve assuming that other things are constant.
A single indifference curve concerns only one level of satisfaction. But there are a number of indifference curves. The curves that are farther away from the origin represent higher levels of satisfaction as they have larger combinations of X and Y.
An indifference map is where each indifference curve corresponds to a different indifference schedule of the consumer.

Assumptions of Indifference Curve Analysis
The indifference curve analysis retains some of the assumptions of the cardinal theory, rejects others and formulates its own. The assumptions of the ordinal theory are the following:

(1) The consumer acts rationally so as to maximise satisfaction.

(2) There are two goods X and Y.

(3) The consumer possesses complete information about the prices of the goods in the market.

(4) The prices of the two goods are given.

(5) The consumer’s tastes, habits and income remain the same throughout the analysis.

(6) He prefers more of X to less of У or more of Y to less of X.

(7) An indifference curve is negatively inclined sloping downward.

(8) An indifference curve is always convex to the origin.

(9) An indifference curve is smooth and continuous which means that the two goods are highly divisible and those levels of satisfaction also change in a continuous manner.

(10) The consumer arranges the two goods in a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods. He is supposed to rank them in his order of preference and can state if he prefers one combination to the other or is indifferent between them.

(11) Both preference and indifference are transitive. It means that if combination A is preferable to В, and В to C, then A is preferable to C. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C. This is an important assumption for making consistent choices among a large number of combinations.
(12) The consumer is in a position to order all possible combinations of the two goods.
Criticisms
1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.

The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.

2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”

This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.
The conditions of equilibrium in both analysis are similar. According to utility analysis the consumer is in equilibrium when:

MUX / MUy = Px/ Py

According to QC, equilibrium is given by:
MRSxy= Px/ Py
Where MRS xy = MUX / MUy

By substituting for MUx/ MUy MRSxy, we get
MUx/ MUy = Px / Py
Therefore, conditions of equilibrium are similar in both the techniques.

But this criticism is untenable. Prof. Hicks claims, “The replacement of diminishing marginal rate of substitution is not mere translation.

It is a positive change in the theory of consumer demand.” We need not measure utility in fact to know the marginal rate of substitution. The consumer is simply asked to tell how much of if he gives to take an additional unit of X.

3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.

But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.

Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.

4. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.

To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.

5. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.

6. Docs not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.

The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.

The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Though attempts have been made to quantity indifference curve but success is very limited.

7. Based on weak ordering:
Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.

But, according to Prof. Samulson, it is not possible to find many situations of indifference in real world. The weak ordering makes it subjective in nature.

But ordinal analysis is certainly better than coordinal analysis as it is based on fewer assumptions.
2. What is a Budget Constraint?.
Budget constraints occur as a result of scarcity and trade-offs. Scarcity is the concept that all resources are limited, such as time and money. Because resources are scarce, people must make trade-offs (opportunity cost) to efficiently allocate their resources while prioritizing their most important needs and wants (using scale of perference). For example, say a household budget is 2,000 Naira per month. Because the money is not limitless and has a cap, the resource is scarce. Because there is only 2000 Naira per month to cover expenses like rent and food as well as other wants, the household must make trade-offs to cover their most important needs. Most would consider rent and food to be a higher priority than going to the movies, so the family might decide to not go to the movies to be able to afford their rent and food. This is also an example of a budget constraint.

A budget constraint refers to the maximum combined items one can afford with the income generated by the individual. Based on the money available each month, an individual must allocate their funds efficiently to purchase goods and services.

To conceptualize this in a simple way, imagine having only two items that can be purchased with the budget: Hamburgers and shoes. The budget can be spent entirely on hamburgers, entirely on shoes, or some combination of both. The quantity of either good that can be purchased is determined by the price of the good, as well as the quantity purchased, and the price of the other good.

Utility maximisation
Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.

For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction.

Utility maximisation can also refer to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time.

Classical economics
Utility maximisation is an important concept in classical economics. It developed from the utilitarian philosophers of Jeremy Bentham and John Stuart Mill. Early economists such as Alfred Marshall incorporated utility maximisation into economic theory.

An important assumption of classical economics is that the price consumers are willing to pay is a good approximation to the utility that they get from the good. If people are willing to pay $800 for an iPhone X, then this suggests the consumer must get a utility of at least $800.

Diminishing marginal utility
Economists such as Carl Menger, William Stanley Jevons and Marie-Esprit-Léon Walras. And Alfred Marshall developed ideas such as diminishing marginal utility. The idea that after a certain point, extra quantities of a good lead to a decline in the marginal utility. (For example – The first car gives high utility, but the utility of a second is much lower.
How individuals achieve utility maximisation
How much to consume?
A consumer will consume a good up to the point where the marginal utility is greater than or equal to the price.

If you feel a sandwich gives you more utility than the cost of buying then you will continue to buy
mu-mc
In this example, the optimal consumption of units is 2. A third one gives you a utility equal to 50p – but this is less than the price.
When choosing between different goods, the Equi-Marginal principle argues that consumers will maximise total utility from their incomes by consuming that combination of goods where:

MUa = Pa
—– —-
MUb = Pb

Another way of showing utility maximisation is through the use of indifference curves and budget lines

Indifference curves show different combinations of goods which gave the same utility.
A budge line shows disposable income and the maximum potential goods that can be bought
Indifference curves further to the right are more desirable as they have bigger combinations of goods.
Utility will be maximised at the furthest indifference curve still affordable.

3. The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers’ expectations about prices are assumed to be based on observations of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term “cobweb theorem” (see Kaldor, 1938 and Pashigian, 2008), citing previous analyses in German by Henry Schultz and Umberto Ricci.

The model
The convergent case: each new outcome is successively closer to the intersection of supply and demand.

The divergent case: each new outcome is successively further from the intersection of supply and demand.
The cobweb model is generally based on a time lag between supply and demand decisions. Agricultural markets are a context where the cobweb model might apply, since there is a lag between planting and harvesting (Kaldor, 1934, gives two agricultural examples: rubber and corn). Suppose for example that as a result of unexpectedly bad weather, farmers go to market with an unusually small crop of strawberries. This shortage, equivalent to a leftward shift in the market’s supply curve, results in high prices. If farmers expect these high price conditions to continue, then in the following year, they will raise their production of strawberries relative to other crops. Therefore, when they go to market the supply will be high, resulting in low prices. If they then expect low prices to continue, they will decrease their production of strawberries for the next year, resulting in high prices again.

This process is illustrated by the adjacent diagrams. The equilibrium price is at the intersection of the supply and demand curves. A poor harvest in period 1 means supply falls to Q1, so that prices rise to P1. If producers plan their period 2 production under the expectation that this high price will continue, then the period 2 supply will be higher, at Q2. Prices therefore fall to P2 when they try to sell all their output. As this process repeats itself, oscillating between periods of low supply with high prices and then high supply with low prices, the price and quantity trace out a spiral. They may spiral inwards, as in the top figure, in which case the economy converges to the equilibrium where supply and demand cross; or they may spiral outwards, with the fluctuations increasing in magnitude.

The cobweb model can have two types of outcomes:

If the supply curve is steeper than the demand curve, then the fluctuations decrease in magnitude with each cycle, so a plot of the prices and quantities over time would look like an inward spiral, as shown in the first diagram. This is called the stable or convergent case.
If the demand curve is steeper than the supply curve, then the fluctuations increase in magnitude with each cycle, so that prices and quantities spiral outwards. This is called the unstable or divergent case.
Two other possibilities are:

Fluctuations may also maintain a constant magnitude, so a plot of the outcomes would produce a simple rectangle. This happens in the linear case if the supply and demand curves have exactly the same slope (in absolute value).
If the supply curve is less steep than the demand curve near the point where the two curves cross, but more steep when we move sufficiently far away, then prices and quantities will spiral away from the equilibrium price but will not diverge indefinitely; instead, they may converge to a limit cycle.
In either of the first two scenarios, the combination of the spiral and the supply and demand curves often looks like a cobweb, hence the name of the theory.

OKORAFOR CHINONYEREM MGBO
2020/242636
ECONOMICS
200LEVEL

THE INDIFFERENT CURVE
The indifferent curve is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility. The indifference curve in economics examines demand patterns for commodity combinations, budget constraints and helps understand customer preferences.

Assumptions-
1. The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
2. The consumer is expected to buy any of the two commodities in a combination.
3. Then rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
4. The consumer behavior remains constant in the analysis. That is in terms of taste,habit and income.
5. The expressed in terms of ordinal numbers.
Assumes marginal rate of substitution to diminish.

Criticism –
(1) Old Wine in New Bottles:
Professor Robertson does not find anything new in the indifference cure technique and regards it simply ‘the old wine in a new bottle’. It substitutes the concept of preference for utility. It replaces introspective cardinalism by introspective ordinalism. Instead of the cardinal numbers such as 1, 2, 3, etc., ordinal numbers I, II, III, etc. are used to indicate consumer preferences. It substitutes marginal utility by marginal rate of substitution and the law of diminishing marginal utility by the principle of diminishing marginal rate of substitution.
(2) Away from Reality:
With regard to the assertion that the indifference curve technique is superior to the cardinal utility analysis because it is based on fewer assumptions, Prof. Robertson observes: “The fact that the indifference hypothesis, the more complicated of the two psychologically, happens to be more economical logically, affords no guarantee that it is nearer to the truth.” He further asks, can we ignore four- feeted animals on the ground that only two feet are needed for walking?
(3) Midway House:
Indifference curves are hypothetical because they are not subject to direct measurements. Although consumer choices are grouped in combinations on the ordinal scale, no operational method has been devised so far to measure the exact shape of an indifference curve. This stems from the fact that ‘the peculiar logical structure of the theory has low empiric content.’ The failure of Hicks to present a scientific approach to the consumer’s behaviour led Schumpeter to characterize the indifference analysis as a ‘midway house;’. He remarked: “From a practical standpoint we are not much better off when drawing purely imaginary indifference curves than we are when speaking of purely imaginary utility functions.”
(4) Fails to Explain the Observed Behaviour of the Consumer:
Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation. In fact, what we observe is the composite price effect. Similarly, the theory of complementaries and substitutes based on the principle of marginal rate of substitution cannot be discovered from the market data. Samuelson has explained the observed behaviour of the consumer in his Revealed Preference Theory.
(5) The Consumer is not Rational:
The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.
(6) Combinations are not based on any Principle:
Since the combinations are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not possess any significance for the consumer.
(7) Limited Analysis of Consumer’s Behaviour:
Further, the assumption that the consumer buys more units of the same good when its price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of “conspicuous consumption” and wants to display or to have variety. Changes in the tastes of the consumer or his indulging in speculative purchases also affects his preference for the goods. These exceptions make the indifference analysis a limited study of consumer behaviour.
(8) Failure to consider some other Factors concerning Consumer Behaviour:
The indifference curve analysis does not consider speculative demand, interdependence of the preferences of consumers in the form of snob, Veblen and Bandwagon effects, the effects of advertising, of stocks, etc.
(9) Two-Goods Model Unrealistic:
Again, the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants. But the difficulty is that in the case of more than three goods geometry fails and economists will have to depend upon complicated mathematical solutions for analysing the problem of consumer behaviour.

BUDGET CONSTRAINT
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you.
For example, if you are a sales professional with a ¥2,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.
The same principle of budget constraint can also be applied to time. If you are a manager, your employees only have a certain number of hours in a workday, which means you need to determine how much of their time they should spend on the various things they need to accomplish. The calculation may vary from week to week as your business priorities change and your employees’ available time adjusts since some weeks include holidays or employees might take time off.
Formula: (x1×y1)+(x2×y2)=m
where,x1 is the cost of the first item, x2 is the cost of the second item and m is the amount of money available. y1 and y2 represent the quantity of each item you are purchasing. You could express this equation verbally by saying that the cost of the total number of X items added to the cost of the total number of Y items must equal the amount of money or income you have available.

UTILITY MAXIMIZATION
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions.
For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.
The concept of utility maximization was developed by the utilitarian philosophers Jeremy Bentham and John Stuart Mill. It was incorporated into economics by English economist Alfred Marshall. An assumption in classical economics is that the cost of a product that a consumer is willing to pay is an approximation of the maximum utility that they receive from the purchased good.

COBWEB THEORY
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

ASSUMPTIONS OF COBWEB THEORY
—In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
—A key determinant of supply will be the price from the previous year.
—A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
—Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
1. if there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
2. However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
3. If supply is reduced, then this will cause the price to rise.
4. If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.

In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

LIMITATIONS OF COBWEB THEORY
RATIONAL EXPECTATIONS- The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
PRICE DIVERGENCE IS UNREALISTIC AND NOT EMPIRICALLY SEEN- The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
IT MAY NOT BE EASY OR DESIRABLE TO SWITCH SUPPLY- A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.
OTHER FACTORS AFFECTING PRICE- There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.
BUFFER STOCK SCHEMES- Governments or producers could band together to limit price volatility by buying surplus.

Igbokwe Gloria Somtoochukwu
Economics
2020/245316

1.An indifference curve shows a combination of two goods in various quantities that provides equal satisfaction (utility) to an individual. It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
ASSUMPTIONS:(a)The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice. There are two goods x and y.The price of the two goods are given. The curve is always convex to the origin.
CRITICISM: Old wine in new bottle: prof Robertson didn’t see anything new in the indifference curve technique, so he called it a old wine in new bottle.
Away from reality and are non- transitive, the consumer is not rational.

2.Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions. Utility function measures the intensity to which an individual’s fulfillment is met.
Budget constraint is the total amount of items you can afford within a current budget. Budget constraint illustrates the range of choices available within that budget. Budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. Opportunity cost measures cost in terms of what must be given up in exchange.

3. Cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.Cobweb theory is the idea that price fluctuation can lead to fluctuations in supply which cause a cycle of raising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors,such as the weather.Cobweb theory has played an essential role incorporating both features as explanations for endogeneity of price and production cycles in commodity markets. Empirical testing of cobweb models explored the possibility ‘short run’ supply and demand elasticities could produce temporary market instability.

Ozonwoye Adaeze Maryann
2020/242617
adaeze.ozonwoye.242617.@unn.edu.ng

1). INDIFFERENCE CURVE:
An indifference curve is a curve that shows the combination of two goods, say X and Y, in various quantities that equal satisfaction to an individual. Therefore an indifference curve shows a set of consumption bundles about which the individual is indifferent. The indifference curve is negatively sloped.

In a situation where there is more than one indifference curve, the farther the indifference curve is away from the origin, the higher the level of satisfaction gotten from the combination of the two goods in the study. The indifference curve has the following properties:
The indifference curve is downward-sloping.
The slope of the indifference curve is convex.
Curves plotted higher and farther to the right correspond with higher levels of utility.
Various indifference curves can never cross or overlap.
ASSUMPTIONS OF THE INDIFFERENCE CURVE
The following assumptions are made in the indifference curve:
i. There are two goods: X and Y.
ii. The consumer is rational.
iii. There is perfect competition.
iv. It is assumed that goods X and Y are homogenous and divisible.
v. The prices of goods X and Y are given.
vi. The consumer’s taste, habits and money income is constant throughout the analysis.
vii. The consumer arranges his two goods on a scale of preference, therefore meaning he has both preference and indifference for the goods.
viii. Both preference and indifference are transitive.
ix. The indifference curve is convex to the origin.
The indifference curve is negatively inclined and slopes downward.
CRITICISMS OF THE INDIFFERENCE CURVE
i. There is no perfect market.
ii. Consumer income is not constant.
iii. Not all goods are divisible
iv. There are more than two goods in the market.

2a). BUDGET CONSTRAINT
Everyone can’t afford to own everything he or she wants. Each of us has a budget that limits the extent of our consumption and Economists call this limit a budget constraint. So, therefore, Budget constraint is the set of all the bundles a consumer can afford given that consumer’s income. The budget constraint is governed by income on the one hand, how much money a consumer has available to spend on consumption, and the prices of the goods the consumer purchases on the other.
The formula for budget constraint is:
P1× X1 + P2 × X2 = M
where;
X1 represents good 1 that the consumer wants to buy.
X2 represents goods 2 which stands for every other goods that the consumer wants to buy aside from good 1.
P1 represents the price of good 1.
P2 represents the price of good 2.
M represents the consumer money income or budget line.

2b). UTILITY MAXIMIZATION
Utility maximization is also known as consumer equilibrium. It is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
Utility is maximized when total outlays equal the budget available and when the ratios of marginal utility to price are equal for all goods and services a consumer consumes. Therefore can also be seen as a point the marginal utility of a commodity equates the price of that commodity.
MU=P
At this point marginal utility is equal to zero, therefore;
MU=P=0

3). COBWEB THEORY
The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. Therefore, the Cobweb theory explains the fact that changes in the price lead to fluctuation in supply and further cause a cycle of rising and falling price.

ASSUMPTIONS OF COBWEB THEORY
The theory is based on three assumptions
There is perfect competition in which each producer assumes that present prices will continue and that his own production plans will not affect the market,
i. Price is completely a function of the preceding period’s supply.
ii. The commodity concerned is perishable.

LIMITATIONS TO COBWEB THEORY
I. Rational expectations: The model assumes farmers base next year’s supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or a ‘bad year and learn from price volatility.

II. Price divergence is unrealistic and not empirically seen: The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price. It may not be easy or desirable to switch supply: A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

III. Other factors affecting price: There are many other factors affecting price than a farmer’s decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

IV. Buffer stock schemes: Governments or producers could band together to limit price volatility by buying surplus.

CRITICS OF THE COBWEB THEORY
i. Price divergence is unrealistic and not empirically seen.
ii. producers suffer aggregate losses over the price cycle when output is determined by the long-run supply curve.

TYPES OF COBWEB THEORY
1. CONTINUOUS COBWEB: This is where the fluctuations in price and output continue repeating about equilibrium at same level.

2. CONVERGENT COBWEB: If the supply curve is steeper than the demand curve, then the fluctuations decrease in magnitude with each cycle, so a plot of the prices and quantities over time would look like an inward spiral. This is called the stable or convergent case.

3. DIVERGENT COBWEB: If the slope of the supply curve is less than the absolute value of the slope of the demand curve, then the fluctuations increase in magnitude with each cycle, so that prices and quantities spiral outwards, this is called the unstable or divergent case. So in the case of diverging Cobweb the amplitude of the fluctuation in price and output increases with the passage of time.

IMPORTANCE OF COBWEB THEORY
i. The cobweb theory helps us to understand how small economic shocks can become amplified by the behaviour of producers.
ii. It concentrates our attention on the important fact that the present events depend upon the past happenings
iii. It furnishes us with a technique to demonstrate the process of change over time.

Àn indifference curve is a graphical representation of different combination bundles off to goods or commodities producing equal levels of satisfaction and utility for the consumerative indifference curve is downward sloping cónvex line connecting the quantity consumed with the amount óf another good consumed.
INDIFFERENCE CURVE ASSUMPTIONS
1: The consumer is rational to maximize the satisfaction a transitive or consistent choice.
2: The consumer is expected to buy any of the two commodities in a combination.
3: Consumers can rank a combination of commodities based on the satisfaction levels.
4: The consumer behavior remains constant in analysis.

CRITICISM
1: indifference curve is said to make unrealistic assumptions about human behavior. It is unable to explain by the consumer.
2: the indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units.

(2) BUDGET CONSTRAINTS
In economics ɓuɗget constraint represent all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.
Consumer theory uses the concepts of a budget constraints and a preference map as tools to examine the parameters of consumer choices. The equation of a budget constraints is P× X + Py Ƴ=m where Px is price of good x and Pƴ is the price of good X anɗ m is income.

UTILITY
Utility is the satisfaction a consumer deriveɗ from consuming a particular gooɗ. Economics theories based on rational choice usually assume that consumers will strive to maximize their utility. The economic utility of a good or service is important to understand because it directly influences the demand and therefore price of good or service.

TYPES Of UTILITY

Form
Time
Place
Possession.

eg no:2020/249748
Department:Business Education
Course :eco 201
1a) Indifference curve is the curve that represents all the combinations of goods that provides an equal level of utility or satisfaction.
b)ASSUMPTIONS OF INDIFFERENCE CURVE
-) The price of the two goods is given
-) An indifference curve is negative inclined sloping downward
-)The consumer taste habit and income remains the same throughout the analysis
-)The consumer acts rationally so as to maximize satisfaction
-)An indifference curve is always convex to the origin
C) CRITICISMS OF INDIFFERENCE CURVE
-) it is based on unrealistic assumption of rationality perfect, competition, division of goods or preference
-)indifference curve is criticized on the ground that it cannot explain consumer behavior.
-)indifference curve is non transitive
-) indifference curve considers different combination of two goods, there may be some combination that is meaningless and cannot be possible in real life
2A)Budget constraint is an economic term referring to the combined amount of item you can afford within the amount of income available to you .
2B)Utility maximization describes the effort of the consumer to obtain the greatest degree of utility or value from a purchases, while keeping the cost of the purchase as low as possible
3) Cobweb theory is the idea that price fluctuations can lead to fluctuation in supply which cause a cycle of rising and falling price.
* cobweb theory of business cycle was propounded in 1930 independently by professor H Schultz of America,J.Tinbergen of the Netherlands and U. Riaci of Italy.But it was Prof Nicholas kaldo in 1934 that assume there is an agricultural market where supply can vary due to variable factor such as weather, he named it cobweb because of the pattern of movement of price and output resembled a cobweb.
IT’S ASSUMPTIONS
-) A key determine of supply will be the price from the previous year.
-) The parameters determining the supply function having constant value over a series of period
-)Current demand (D1) for the commodity is a function of current price (P1)
-) A low price will make some farmers to go out of business
-)The commodity under consideration is perishable and can be stored only for one year
CRITICISMS OF COBWEB THEORY
-) output not determined by price: the theory assumes that the output is determined by the price only. agricultural output in particular is determined by several other factors such as weather, seeds, technology.
-)This is not strictly a trade cycle theorem it’s concerned only with the farming sector. It’s says nothing in other sphere of production.
-)Not Realistic:it is not realistic to assume that the demand and supply conditions remains unchanged over the previous and current period.
-)Continuous cobweb impractical: critics point out that continuous cobweb is impractical because it cannot continue indefinitely. This is because producer incite more loss than profit from it.
IMPLICATIONS OF COBWEB THEORY
-)The cobweb model is an oversimplification of the real price determination process but it supplies new information to the market participants about market behavior.
-) it’s significance lies in the demand, supply and price behavior.
TYPES OF COBWEB THEORIES
Divergent cobweb model
Continuous cobweb model
Convergent cobweb model

NAME: ALIOZOR COLLINS
REG NO: 2020/249500
DEPT: ECONOMICS

An indifference curve is a graph that shows the possible pairing or relation of two goods or commodities that leaves the consumer equally well off or satisfied hence indifferent whenever any pairing of the two things is represented along the curve.
The Indifference curve analysis measures utility ordinarily. An Indifference Curve shows a combination of two goods x and y in various quantities that provides equal satisfaction to an individual. In Economics, it is used to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.

An Indifference schedule is a list of combinations of two commodities the list being so arranged that a consumer is indifferent to the combinations preferring none of any other. Its standard indifferent curve analysis operates using a simple two-dimensional chart, each is represented on the type of economic good. Along the Indifference Curve, the consumer is indifferent between any of the combinations of goods to be represented by points on the curve because the combination of goods on an Indifference Curve provides the same level of utility to the consumer.

Properties of Indifference curve:
1. A higher Indifference Curve to the right of another represent a higher level of satisfaction and preferable combination of the two groups.
2. In between the Indifference Curves, there can be a number of other Indifference Curves one for every point in the space on the diagram.
3. The slope of an Indifference Curve is negative, downward sloping and from left to right. This means that for the consumer to be indifferent to all the combinations on the Indifference Curves, he must have less units of good Y in order to have more of good X.
4. Indifference Curves can neither touch not intersect each other.
5. An Indifference Curve can not touch either axis
6. An important property of Indifference Curve is that they are convex to the origin. The convexity rule implies that the consumer substitute X for Y so that the marginal rate of substitution diminishes. This means that as the amount of X is increased by equal amounts, that of Y diminishes by smaller amounts.
The slope of an Indifference Curve is known as the Marginal Rate of Substitution

Assumptions:
The consumers are rational.
There are only two goods x and y.
The consumer possesses complete information about the prices of goods in the market
The prices of the two goods are given.
The consumer’s taste, habits and income remained the same throughout the analysis.
He prefers more of X to less of Y or more of Y to less of X
An Indifference Curve is always convex to the origin

Criticisms:
Consumers are not always rational
There are not only two goods in the market
There is never a perfect knowledge of the market
It is not applicable in the real world
They are not subject to direct measurements

2. Budget Constraints refers to a set of possible combinations or bundles that are affordable for a consumer. It is all the combinations that cost either less than or equal to the consumer’s income. It represents all the quantities of goods and services that a consumer can buy keeping his income in mind.
Budget line is the set of bundles that cost exactly M:
P1X1 + P2X2 = M

Utility Maximization
This is also known as consumer equilibrium. It is a point where a consumer derive maximum satisfaction when his or her marginal utility equals the price of the commodity.

3. Cobweb Theory is an Economic model that explains why prices might be subject to periodic flunctuations in certain types of markets. It describes cyclical supply and demand in the market where the amount produced must be chosen before prices are observed. Producers expectations about prices are shown to be based on observations of previous prices.

1 An indifference curve is a graphical representation of different combinations or consumption bundles of two goods or commodities providing equal levels of satisfaction and utility for the consumer.An Indifference curve is downward sloping covex line connecting the quantity of goods consumed with the amount of another goods consumed
Indifference Curve Assumptions
1 The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice
2 The consumer is expected to buy any of the two commodities in a combination
3 Consumers can rank a combination of commodities based on their satisfaction levels
4 The consumer behaviour remains constant in the analysis
5 The utility is expressed in terms of ordinal numbers
6 Assumes marginal rate of substitution to diminish
Criticisms
1 Indifference curve is said to make unrealistic assumptions about human behavior. It’s unable to explain risky choices undertaken by the consumer.
2 The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units
2 write short note on budget constraint and utility maximization

What is utility maximization with an example?
Utility maximization means making economic decisions that guarantee the highest level of consumer satisfaction (benefit). An example is when a consumer decides to purchase more of “Product A” and less of “Product B” because this combination guarantees more benefit (utility) per dollar.

How does one maximize utility in economics?
Consumers maximize utility by determining the combination of goods and services that guarantee maximum benefit. For example, if “Product B” promises more marginal utility per dollar than “Product A,” a rational consumer will purchase more of “Product B.”

What Does It Mean to Maximize Utility?
Utility is an economic concept denoting consumers’ benefit or satisfaction from goods or services. According to economic theories on rational choice, consumers always seek to maximize their utility.

It is important to understand what maximum utility is because it influences the price and demand of commodities and services. Utility is the extent to which an economic good or service satisfies the consumer’s needs. In other words, economic utility is the usefulness of the product or service. It is practically impossible to quantify a consumer’s utility or benefit in economics. Analysts indirectly estimate product or service utility using specific economic models.

Daniel Bernoulli, a Swiss mathematician, first introduced the concept of utility in the 18th century. Since then, economic theories have advanced, resulting in different types of utility. The two main types of economic utility are:
Utility for Consumers
Let’s say that you are a college student whose part-time job pays $200 a week. For better or worse, you still live in college housing, and for worse, you are still on the meal plan. How should you spend your $200? Your spending decisions are determined by the amount of utility, or usefulness, you’ll find in a given activity. As you may remember, economists assume that people act to maximize their utility with their resources, and in this case, your version of resources is your paycheck. In other words, you are not so inclined to parade through the quad, tossing money at the nearest person you see.

3 Extensively discuss the cobweb theory
Common theory is the idea that price fluctuations can lead to fluctuations in supply which cause is cycle of rising and falling prices.In a simple cobweb model we assume there is an agricultural market where supply can vary due to variable factors such as the weather.
Assumptions of cobweb theory
1 In an agricultural market, farmers have to decide how much to produce a year in advance before they know what the market price will be
2 A key determinants of supply who be the price from the previous year
3 Demand for agricultural goods is usually price inelastic ( a fall in price only causes a smaller percent increase in demand)
4 A low price will mean some farmers go out business.

Name: NJOKU CHISOM PRECIOUS
Reg. No. 2020/245277
Email address: njiokuchisom@gmail.com
Department: ECONOMICS

1. INDIFFERENCE CURVE
An Indifference curve is a graph showing the combination of two goods(X and Y) that gives equal satisfaction and utility to the consumer.
The amount of satisfaction derived by the consumer from the consumption of the two goods must be equal(indifferent).

ASSUMPTIONS OF INDIFFERENCE CURVE
1. It is assumed that the consumer is rational and maximises satisfaction.
2. The price of goods is constant and given.
3. It is also assumed that higher Indifference curve gives the highest satisfaction and lower Indifference curve gives the lowest satisfaction.
4. Two indifferent curve(X and Y) never intersects each other.
5. An Indifference curve is always convex to the point of origin.

CRITICISMS ON THE ASSUMPTIONS OF INDIFFERENCE CURVE
1. Assumptions of the analysis are unrealistic.
2. It does no take into account the risk of the choices.
3. It also has a weak ordering hypothesis.

2. BUDGET CONSTRAINT AND UTILITY
MAXIMIZATION
Budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. It refers to all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.
While Utility Maximization is the ability of an individual or a consumer to maximise satisfaction that is being derived from the consumption of commodities which must be within their income or budget.
It has a lot to do with budget constraint in that the consumer is highly constrained or limited by his income and therefore, must strike balance by maximising satisfaction from that limited income available.

3. THE COBWEB THEORY
The Cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers’ expectations about prices are assumed to be based on observations of previous prices.

The convergent case: each new outcome is successively closer to the intersection of supply and demand.
The divergent case: each new outcome is successively further from the intersection of supply and demand.

The cobweb model is generally based on a time lag between supply and demand decisions. Agricultural markets are a context where the cobweb model might apply, since there is a lag between planting and harvesting. Suppose for example that as a result of unexpectedly bad weather, farmers go to market with an unusually small crop of strawberries. This shortage, equivalent to a leftward shift in the market’s supply curve, results in high prices. If farmers expect these high price conditions to continue, then in the following year, they will raise their production of strawberries relative to other crops. Therefore, when they go to market the supply will be high, resulting in low prices. If they then expect low prices to continue, they will decrease their production of strawberries for the next year, resulting in high prices.

The cobweb model can have two types of outcomes:

If the supply curve is steeper than the demand curve, then the fluctuations decrease in magnitude with each cycle, so a plot of the prices and quantities over time would look like an inward spiral, as shown in the first diagram. This is called the stable or convergent case.If the demand curve is steeper than the supply curve, then the fluctuations increase in magnitude with each cycle, so that prices and quantities spiral outwards. This is called the unstable or divergent case.

It asserts that supply adjusts itself to changing conditions of demand which are manifested through price changes not instantaneously but after certain period. This time, taken by the supply to adjust itself to changes in demand is known as lag.
Thus the quantity supplied during any given time period is the function of the price prevailed in earlier time period to while the demand depends upon the price that prevails in period itself. The core of this theory is that the response of supply to price ranges is not instantaneous.

The Cobweb Theory of trade cycle has its chief application in the case of agricultural products the supply of which can be increased or decreased with certain time-lag. Most crops can be sown and reaped only once a year. For instance, if the price of wheat increases say in September 2007 then supply will not increase instantaneously.

The farmer will, of course, devote larger farm acreage to wheat cultivation in the next crop season and so it will take one year before supply increases in response to increase in wheat price. Thus the supply of wheat in 2008 will depend upon the price of wheat that prevailed in 2007 which offered the farmer inducement to devote more land to wheat cultivation.
ASSUMPTIONS OF COBWEB THEORY
This theorem is based on three assumptions:

I. Perfect competition in which each producer assumes that present prices will continue and that his own production plans will not affect the market,

ii. Price is completely a function of the preceding period’s supply

iii. The commodity concerned is perishable. These assumptions show that the theory is particularly applicable to agricultural products.

1. An indifference curve depicts a combination of two items in varying proportions that provides an individual with equal satisfaction (utility).
It is a term used in economics to indicate the point at which individuals have no preference for one good over another based on their relative amounts.
ASSUMPTIONS
i. The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
ii. The consumer is expected to buy any of the two commodities in a combination.
iii. Consumers can rank a combination of commodities based on their satisfaction levels.
iv. The combination with the higher satisfaction level is preferred.
v. The consumer behavior remains constant in the analysis.
vi. The utility is expressed in terms of ordinal numbers.
CRITICISMS
a. Does not provide behaviouristic explanation of consumer behaviour.
b. It’s combinations are Absurd and unrealistic.
c. Fails to explain risky choices.
d. Unrealistic assumptions.

2a. The total number of products you can afford within your present budget is referred to as your budget constraint.
A budget constraint is an economic word that refers to the total number of products you can afford within the amount of money you have available to you. It demonstrates the variety of options available within that budget.
2b. Utility maximization is the idea that individuals and organizations want to get the most out of their economic decisions.
The utility function assesses the degree to which an individual’s fulfillment is realized.

3. The cobweb model, also known as cobweb theory, is an economic model that explains why prices in particular types of markets may fluctuate on a regular basis. It describes cyclical supply and demand in a market where the quantity produced must be determined before prices can be seen. Producers’ pricing forecasts are considered to be based on previous price observations. In 1934, Nicholas Kaldor examined the model and coined the phrase “cobweb theorem”, using previous German investigations by Henry Schultz and Umberto Ricci.

NAME: CHUKWU EMMANUEL CHIMEZIE
REG NO: 2020/241925
DEPARTMENT: ECONOMICS MAJOR(200 LEVEL)

NO 1
Q. Discuss briefly the Indifference Curve (Including its Assumptions and Criticisms)

Ans: An indifference curve is a graph that shows the possible pairing or relation of two goods or commodities that leaves the consumer equally well off or satisfied hence indifferent whenever any pairing of the two things is represented along the curve.
The Indifference curve analysis measures utility ordinarily. An Indifference Curve shows a combination of two goods x and y in various quantities that provides equal satisfaction to an individual. In Economics, it is used to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
For instance that someone loves both ice cream and chocolate. Then, it may been different if one bought 15 ice cream and no chocolates or 42 chocolate and no ice cream or some combination of the two like 15 ice cream and 15 chocolate. Each combination has value in its own right.
An Indifference schedule is a list of combinations of two commodities the list being so arranged that a consumer is indifferent to the combinations preferring none of any other. Its standard indifferent curve analysis operates using a simple two-dimensional chart, each is represented on the type of economic good. Along the Indifference Curve, the consumer is indifferent between any of the combinations of goods to be represented by points on the curve because the combination of goods on an Indifference Curve provides the same level of utility to the consumer.

Properties of Indifference curve

1. A higher Indifference Curve to the right of another represent a higher level of satisfaction and preferable combination of the two groups.
2. In between the Indifference Curves, there can be a number of other Indifference Curves one for every point in the space on the diagram.
3. The slope of an Indifference Curve is negative, downward sloping and from left to right. This means that for the consumer to be indifferent to all the combinations on the Indifference Curves, he must have less units of good Y in order to have more of good X.
4. Indifference Curves can neither touch not intersect each other.
6. An Indifference Curve can not touch either axis
7. An important property of Indifference Curve is that they are convex to the origin. The convexity rule implies that the consumer substitute X for Y so that the marginal rate of substitution diminishes. This means that as the amount of X is increased by equal amounts, that of Y diminishes by smaller amounts.

NB: the slope of an Indifference Curve is known as the Marginal Rate of Substitution (MRS)
The MRS measures the rate at which the consumer is just willing to substitute one good for the other as long as the new good is equally satisfying

Assumptions:

1. The consumers are rational.
2. There are only two goods x and y.
3. The consumer possesses complete information about the prices of goods in the market
4. The prices of the two goods are given.
5. The consumer’s taste, habits and income remained the same throughout the analysis.
6. He prefers more of X to less of Y or more of Y to less of X
7. An Indifference Curve is always convex to the origin

Criticisms:

1. Consumers are not always rational
2. There are not only two goods in the market
3. There is never a perfect knowledge of the market
4. It is not applicable in the real world
5. They are not subject to direct measurements

No 2
Q. Write short note on Budget Constraints and Utility Maximisation

Ans: Budget Constraints refers to a set of possible combinations or bundles that are affordable for a consumer. It is all the combinations that cost either less than or equal to the consumer’s income. It represents all the quantities of goods and services that a consumer can buy keeping his income in mind.
Budget line is the set of bundles that cost exactly M:
P1X1 + P2X2 = M
Where
P1X1 is the amount of money the consumer is spending on good 1
P2X2 is the amount of money that the consumer is spending on good 2
M is the amount of money the consumer has to spend.

Utility Maximization
This is also known as consumer equilibrium. It is a point where a consumer derive maximum satisfaction when his or her marginal utility equals the price of the commodity. At this point marginal utility is equal to zero
Thus; MUx = Price x = 0
It is the attainment of the greatest possible total utility

No 3
Q. Extensively discuss the Cobweb Theory

Ans: The Cobweb Model or Cobweb Theory was coined by Nicholas kaldor in 1934. Cobweb Theory is an Economic model that explains why prices might be subject to periodic flunctuations in certain types of markets. It describes cyclical supply and demand in the market where the amount produced must be chosen before prices are observed. Producers expectations about prices are shown to be based on observations of previous prices.
The Model:
The Cobweb Model is generally based on a time lag between supply and demand decisions. Agricultural markets are a context where the Cobweb Model might apply since there is a lag between planting and harvesting
Suppose for example that as a result of an unexpectedly bad weather, farmers go to market with an unusually small crop of strawberries this shortage equivalent to a leftward shift in the market supply curve results in higher prices if farmers expect these high price conditions to continue. Then in the following year they will reach the production of strawberries relative to other crops.
Therefore when they go to the market, the supply will be high resulting in low prices. If they then expect lower prices to continue, they will decrease the production of strawberries for the next year resulting in higher prices.

TWO TYPES OF OUTCOME OF THE COBWEB MODEL

1. If the supply curve is steeper than the demand curve, then the fluctuations decrease in magnitude with each cycle, so a plot of the prices and quantities overtime would look like an Inward spiral.
This is called the stable or convergent

2. If the demand curve is steeper than the supply curve, then the flunctuations increase magnitude with each cycle so that prices and quantities spiral outwards.
This is called the unstable or divergent case

Name: Odu Gideon Odu
Course: Eco 201
Department: Economics
Answer
1 And indifference curve shows a combination of two good, say X and Y is various quantities that provides equal satisfaction (utility) to an individual in economics, it is used to describe the point where individuals have no particular preference for O : the one good or another based on their relative quantities.
An indifference schedule is a list of combination two commodities the list being so arranged that a consumer is different to the combination, preferring none of any other
ASSUMPTIONS OF THE INDIFFERENCE CURVE ANALYSIS
1 The customers act rationally so as to maximize satisfaction
2 There are two goods X and Y
3 The consumer possesses complete information about the price of goods in the market
4 The price of the two goods are given
5 The consumers taste, habit and income remaining the same throughout the analysis
6 He prefer more of X to loss of Y or more of Y to loss of X
7 An indifference curve is always convex to the origin
8 An indifference curve is negatively inclined sloping downward
CRITICISM
Indifference curve is said to Make unrealistic assumption about human behavior
1 it is unable to explain risky choice undertaken by the consumers
2 it has been criticized for being an ‘old win in a new bottle’ for it has merely rehashed the concept of diminishing marginal utility of a product in new forms
3 Cardinal measurement implicit in I . C technique
It is assumed in that the consumer is capable of regarding change in another situation.
4. Indifference curves are non-transitive; it is only when utility difference is zero that the relation between any two or more points on an indifference curve is symmetrical.
5. The consumer is not rational
2) BUDGET CONSTRAINT is the total amount of items you can afford within a current budget. Budget constraint illustrates the range of choices available within that budget. Opportunity cost is the amount or item you give up in exchange for something else. Sunk cost is the amount spent in the past and cannot be recovered. The budget constraint is the boundary of the boundary of the opportunity set-all possible combinations of consumption that someone can afford given the price of goods and the individuals income
UTILITY MAXIMIZATION
Utility maximization is the concepts that individuals and organization seek to attain the highest level of satisfaction from their economics decision
Utility is maximized when total outlays equals the budget available and when the ratios of marginal utility to price are equal for all goods and services a consumer consumes; this is the utility maximizing condition
The cobweb theory
The cobweb theory is an economic model that explains why prices might be subjected to periodic fluctuations in certain types of market
It describes cyclical supply and demand in a market where the amount produced must chosen before price are observed.

Name : Anelechukwu Precious Kelechi
Department: Economics
Registration Number: 2020/242577

1. Briefly discuss the indifference curve (including it’s assumptions and criticism)

The indifference curve analysis measures utility ordinally. An indifference curve shows a combination of two goods; Say X and Y in various quantities that provides equal satisfaction (utility) to an individual. In economics,it is used to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
A standard indifference curve analysis operates using two-dimensional chart. Each axis represent one type of economic good. Along the indifference curve,the consumer is indifferent between any of the combination of goods represented by points on the curve because the combination of goods on an indifference curve provide same level of utility to the consumer. The indifference curve is convex because of diminishing marginal utility.

ASSUMPTIONS OF THE INDIFFERENCE CURVE analysis
1. The consumer acts rationally so as to maximise satisfaction
2. There are two goods X and Y
3. The consumer possess complete information about the prices of goods in the market
4. The prices of the two goods are given
5. The consumers tastes, habits and income remain the same throughout the analysis
6. He prefers more or X to less of Y or more of Y to less of X
7. An indifference curve is always convex to the origin
8. The Indifference curve is downward sloping and negatively inclined
9. The consumer arranges the two goods in a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods

10. Both preference and indifference are transitive which means that if combination of A is preferable to B, and B to C, then A is preferable to C. Similarly if the consumer is indifferent between combinations A and B and B and C, then he is indifferent between A and C. This is an important assumption for making consistent choices among a large number of combinations

11. The consumer is in a position to order all possible combinations of the two goods

12. An indifference curve is smooth and continuous which means that the two goods are highly divisible and that levels of satisfaction also change in a continuous manner

CRITICISM OF INDIFFERENCE CURVE
1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.

The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.

2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”

This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.

The conditions of equilibrium in both analysis are similar. According to utility analysis the consumer is in equilibrium when:

MUX / MUy = Px/ Py
According to QC, equilibrium is given by:

MRSxy= Px/ Py

Where MRS xy = MUX / MUy

By substituting for MUx/ MUy MRSxy, we get
MUx/ MUy = Px / Py
Therefore, conditions of equilibrium are similar in both the techniques.

But this criticism is untenable. Prof. Hicks claims, “The replacement of diminishing marginal rate of substitution is not mere translation.

It is a positive change in the theory of consumer demand.” We need not measure utility in fact to know the marginal rate of substitution. The consumer is simply asked to tell how much of if he gives to take an additional unit of X.

3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.

But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.
Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.

4. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.

To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.

5. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.

2. Write a short note on Budget Constraint and utility maximization

A budget constraint is an economic term referring to the combination amount of items you can afford within the amount of income available to you. In economics, a budget constraint represents all the combination of good and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraints and a preference map as a tools to examine the parameters of consumer choices. The consumer can only purchase as much as their income will allow hence they are constrained by their budget. The equation of a budget constraints is P_x X + P_y Y = m
Where P_x is the price of good X and P_y is the price of good Y and m = Income

Utility Maximization is also known as consumer equilibrium it is a point where a consumer derives maximum satisfaction when his or her marginal utility equates the price of the commodity. At this point, marginal utility is Zero
This, Mux = Price x =0
Utility maximization is the attainment of the greatest possible total utility. While consumers would want to attain maximum utility they are constrained by the available income and the prices of goods.
Note that the laws of diminishing marginal utility directly impacts a company’s pricing because the price charged for and item must correspond to the consumer’s marginal utility and willingness to consume or utilize a good

3. EXTENSIVELY DISCUSS THE COBWEB THEORY

Cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producer’s expectations bout prices are assumed to be based on observation of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term “Cobweb theory”
Cobweb theory is and idea that price fluctuations can leas to fluctuations in supply which cause a cycle of rising and falling prices.

ASSUMPTIONS OF COBWEB THEORY
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
1. If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
2. However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
3. If supply is reduced, then this will cause the price to rise.
4. If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

LIMITATIONS OF COBWEB THEORY
1. Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

2. Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

3. It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

4. Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

5. Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

6. Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus.

NAME MBADIHE LUCY CHIDERA
REG NO 2020/242899
COURSE CODE ECO 201
COURSE TITLE MICRO ECONOMICS
INDIFFERENCE CURVE
An indifference curve shows the locus of points representing basket of goods,all of which given the consumer equal level of satisfaction.
ASSUMPTION OF AN INDIFFERENCE CURVE
An indifference curve is negatively inclined and sloping downwards
2 Both preference and inference are transitive
3 An indifference curve is smooth and also highly indivisible
4 it assumes that consumers act rational to maximize satisfaction
5 consumer tastes, income and habit will remain the same through the analysis.
CRITICISMS OF AN INDIFFERENCE CURVE
1 The assertion that the indifference curve technique is superior to the cardinal utility analysis because it is based on fewer assumptions
The fact that the indifference hypothesis, the more complicated of the two psychologically happens to be more economically logically affords no guarantee that is nearer to the truth
2 indifference curve are Non-transitive
One of the greatest critics of the indifference hypothesis is W.E Amstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations
3 The consumer is not rational
The indifference analysis, like the utility theory assumes that the consumer act rationally. He is of a calculating mind that carries innumerable combination of different commodities in his head can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods.
4 Two goods model unrealistic
The two goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable want.
BUDGET CONSTRAINT AND UTILITY MAXIMIZATION
Budget constraint
This is defined as the locus of points indicating various combination of goods that can be purchased if the entire money income is spent.
A budget constraint is a constraint imposed on consumer choice by their limited budget.
All consumers have a limit on how much they earn and therefore the limited budgets that they allocated to different goods.
The budget constraint represents all the possible combination of two or more goods that a consumer can purchase given current prices and their budget.
Properties of the Budget constraint
1 The slope of the budget line reflect the trade-off between the two goods represented by the ratio of the prices of these two goods.
2 A budget line is linear with the slope to the negative ratio of the prices of the two goods.
The formulae for the budget constraint line is
P1 by Q1+ P2 by Q2
Utility Maximization
This was propounded by an economist called Goshen, who referred to it as the Lawrence of maximum satisfaction derived by consumers. Since resources are scarce , a consumer will always want to derive maximum satisfaction from a good consumer.His ability to buy more or less of a given good will depends on the MU derived. Based on the price level, he will prefer to buy more if price is reduced and vice versa given his limited resources.

COBWEB THEORY
Cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of market. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.
Assumptions of cobweb theory
1 In agricultural market, farmers have to decide how much to produce a year in advance before that know what the market price will be. Supply is inelastic in short term.
2 A low price will mean some farmers go out of business. Also a low price will discourage farmers from growing that crop that year.
3 Demand for agricultural goods is usually price inelastic. A fall in price only causes a smaller percent increase in demand .
Limitations of cobweb theory
1 rational expectations
2 price divergence is unrealistic and not empirical seem
3 it may not be easy or desirable to switch supply .

Orajiaku Chidera Princewill
chideraprince44@gmail.com
2020/242647

1.) An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—when it comes to having any combination between the two items that is shown along the curve. It connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve.

ASSUMPTIONS OF INDIFFERENCE CURVE
1. The consumer acts rationally so as to maximize satisfaction
2. There are 2 goods X and Y
3. The consumer possesses complete information about the prices of goods in the market.
4. The prices of the two goods are given
5. The consumer’s tastes, habits, and income remain the same throughout the analysis.
6. He prefers more of X to less of Y or more of Y to less of X.
7. An indifference curve is always convex to the origin.
8. An indifference curve is negatively inclined, sloping downwards.
9. An indifference curve is smooth and continuous.
10. The consumer arranges the two goods in a scale of preference which means he has both preference and indifference for the goods.
11. Both preference and indifference are transitive.
12. The consumer is in a position to order all possible combinations of the two goods.

2.) Budget constraint refers to the maximum combined items one can afford with the income generated by the individual. Based on the money available each month, an individual must allocate their funds efficiently to purchase goods and services. Budget constraint is the total amount of items you can afford within a current budget. Budget constraint illustrates the range of choices available within that budget.

Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions. For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction. Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.

3.) Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. The cobweb theorem is an economic model used to explain how small economic shocks can become amplified by the behaviour of producers. The amplification is, essentially, the result of information failure, where producers base their current output on the average price they obtain in the market during the previous year. This is, to some extent, a non-rational decision, given that a supply side shock between planting and harvesting (such as an unexpectedly good or bad harvest) can lead to an unexpectedly lower or higher price. This results in either a higher output or a lower output in subsequent years, and moves the market into a long-term disequilibrium position.

Name: ONUOHA CHIJINDU
Reg.no: 2020/249380
Email: chijindub747@gmail.com

Answers to Question 1.
INDIFFERENCE CURVE
An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied, hence indifferent when it comes to having any combination between the two items that is shown along the curve. It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
Example illustrating indifferent curve; if you like both meatpie and eggroll, you may be indifferent to buying either 15 meatpies and no eggroll, 30 meatpies and no eggroll or some combination of the two, for example, 16 meatpies and 20 eggrolls. Either combination provides the same utility.
The slope of the indifference curve is known as the marginal rate of substitution (MRS).
The formula used in economics for constructing an indifference curve is: ????(????, ????)=????
where: c stands for the utility level achieved on the curve and is constant. t and y are the quantities of two different goods, t and y.

SOME ASSUMPTIONS OF INDIFFERENCE CURVE
1. Each indifference curve is typically convex to the origin, and no two indifference curves ever intersect.
2. As income increases, an individual will typically shift their consumption level because they can afford more commodities, with the result that they will end up on an indifference curve that is farther from the origin, hence better off.
3. Indifference curve analysis typically assumes that all other variables are constant or stable.

SOME CRITICISMS AND COMPLICATIONS OF INDIFFERENCE CURVE
1. Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior.
2. It is theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points.

Answers to Question 2.
BUDGET CONSTRAINT
Budget constraint refers to the maximum combined items one can afford with the income generated by the individual. Based on the money available each month, an individual must allocate their funds efficiently to purchase goods and services.
In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. To break this down in a simple way, imagine having only two items that can be purchased with the budget: golden mourn and t-shirts. The budget can be spent entirely on golden mourn, entirely on t-shirts, or some combination of both. The quantity of either good that can be purchased is determined by the price of the good, as well as the quantity purchased, and the price of the other good. The formulae for budget constraint is: P1×Q1+P2×Q2 = 1

UTILITY MAXIMISATION
Utility maximisation is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit. The condition for maximising utility is: MUA/PA = MUB/PB where: MU is marginal utility and P is price.

Answers to Question 3.
COBWEB THEORY
The theory in economics that defines the subjective fluctuations of price in the market is referred as the Cobweb theory. The Cobweb theory explains the fact that changes in the price lead to fluctuation in supply and further cause a cycle of rising and falling price. Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
Example illustrating cobweb theory: Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

SOME ASSUMPTIONS OF COBWEB THEORY
1. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
2. In an agricultural market, farmers have to decide how much to produce a year in advance before they know what the market price will be. (supply is price inelastic in short-term)
3. A key determinant of supply will be the price from the previous year.
4. A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
5. Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)

COBWEB THEORY AND PRICE DIVERGENCE
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point).

COBWEB THEORY AND PRICE CONVERGENCE
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium.

LIMITATIONS OF COBWEB THEORY
1. Rational expectations: The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad’ year and learn from price volatility.
2. Price divergence is unrealistic and not empirically seen: The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
3. It may not be easy or desirable to switch supply: A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.
4. Other factors affecting price: There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimised by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.
5. Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus.

Agbo Gift Obianuju
2020/243000
agbogift2003@gmail.com

1) An indifference curve is a graphical representation of a combination of two goods that offers the consumer equal satisfaction on consumption, thereby making the consumer indifferent. The consumer derives the same utility along the curve, for any combination. The concept of indifference curve was developed by British Economist Francis Y Edgeworth. It is a tool of microeconomics to demonstrate consumer preferences and the limitations of budget. Indifference curve analysis assumes that all other variables are constant and stable. The slope of the indifference curve is known are the marginal rate of substitution. The marginal rate of substitution is the rate at which the consumer is willing to give up one good for another.

2)Given the goal of consumers is to maximize utility given their budget constraints, they seek that combination of goods that allows them to reach the highest indifference curve given their budget constraint. This occurs where the indifference curve is tangent to the budget constraint

3)The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers’ expectations about prices are assumed to be based on observations of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term “cobweb theorem” (see Kaldor, 1938 and Pashigian, 2008), citing previous analyses in German by Henry Schultz and Umberto Ricci.

NAME:OKOH CHIBUEZE JOSHUA
REG. NUMBER: 20202/250139
DEPARTMENT: ECONOMICS

1) Briefly discuss the indifference curve(including its assumptions and criticisms).
An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility. An indifference schedule is a list of combinations of two goods, the list being so arranged that the consumer is indifferent to the combinations, preferring none of the other. A standard indifference curve analysis operates using a two dimensional chart.
Following are the features of indifference curve
(a) INDIFFERENCE CURVE ALWAYS SLOPES DOWNWARDS FROM LEFT TO RIGHT
An indifference curve has a negative slope, i.e. it slopes downward from left to right.
Reason: If a consumer decides to have one more unit of a commodity
(say apples), quantity of another good (say oranges) must fall so that the total satisfaction (utility) remains same.
(b) INDIFFERENCE CURVE IS ALWAYS CONVEX TO THE ORIGIN
IC is strictly Convex to origin i.e. MRSxy is always diminishing
Reason: Due to the law of diminishing marginal utility a consumer is always willing to sacrifice lesser units of a commodity for every additional unit of another good.
(c) HIGHER INDIFFERENCE CURVE REPRESENTS
HIGHER LEVEL OF SATISFACTION
Higher indifference curve represents larger bundles of goods i.e. bundles which contain more of both or more of at least one.
It is assumed that consumer’s preferences are monotonic i.e. he always prefers larger bundle as it gives him higher satisfaction.
ASSUMPTIONS OF INDIFFERENCE CURVE
(1) The consumer acts rationally so as to maximise satisfaction.

(2) There are two goods X and Y.

(3) The consumer possesses complete information about the prices of the goods in the market.

4) The prices of the two goods are given.

(5) The consumer’s tastes, habits and income remain the same throughout the analysis.

(6) He prefers more of X to less of У or more of Y to less of X.

(7) An indifference curve is negatively inclined sloping downward.

8) An indifference curve is always convex to the origin.

(9) An indifference curve is smooth and continuous which means that the two goods are highly divisible and those levels of satisfaction also change in a continuous manner.

(10) The consumer arranges the two goods in a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods. He is supposed to rank them in his order of preference and can state if he prefers one combination to the other or is indifferent between them.

(11) Both preference and indifference are transitive. It means that if combination A is preferable to В, and В to C, then A is preferable to C. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C. This is an important assumption for making consistent choices among a large number of combinations.

CRITICISMS OF INDIFFERENCE CURVE
1. Cardinal Measurement implicit in l.C. Technique:
Prof. Robertson further points out that the cardinal measurement of utility is implicit in the indifference hypothesis when we analyse substitutes and complements. It is assumed in their case that the consumer is capable of regarding a change in one situation to be preferable to another change in another situation. To explain it, Robertson takes three situations A, В and C, as shown in Figure I2.38. Suppose the consumer compares one change in situation AB with another change in situation BC.
He prefers the change AB more highly than the change BC. If another point D is taken, then he prefers the change AD as highly as the change DC. This, according to Robertson, is equivalent to saying that the space AC is twice the space AD and we are back in the world of cardinal measurement of utility. Thus when changes in two situations are compared as in the case of substitutes and complements, it leads to the cardinal measurement of utility.
2. Midway House:
Indifference curves are hypothetical because they are not subject to direct measurements. Although consumer choices are grouped in combinations on the ordinal scale, no operational method has been devised so far to measure the exact shape of an indifference curve. This stems from the fact that ‘the peculiar logical structure of the theory has low empiric content.’ The failure of Hicks to present a scientific approach to the consumer’s behaviour led Schumpeter to characterize the indifference analysis as a ‘midway house;’. He remarked: “From a practical standpoint we are not much better off when drawing purely imaginary indifference curves than we are when speaking of purely imaginary utility functions.”

3. Fails to Explain the Observed Behaviour of the Consumer:
Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation. In fact, what we observe is the composite price effect. Similarly, the theory of complementaries and substitutes based on the principle of marginal rate of substitution cannot be discovered from the market data. Samuelson has explained the observed behaviour of the consumer in his Revealed Preference Theory.
4. Indifference Curves are Non-transitive:
One of the greatest critics of the indifference hypothesis is W.E. Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations. He further opines that any two points on an indifference curve are the points of indifference not because they are of iso-utility but of zero-utility difference.
It is only when utility difference is zero that the relation between any two or more points on an indifference curve is symmetrical. Armstrong’s arguments can be explained with the help of Figure 12.39 where on I1 curve points P, Q, R and S represent different combinations of the goods X and Y. The points P and Q, R and S are so drawn that the difference between each pair is imperceptible.
Points P and Q or R and S will be of iso-utility only if utility difference between them is zero. But the consumer cannot be indifferent between P and R because the difference of total utility between P and R is perceptible. So the consumer will prefer P to R, or R to P in the reverse case. This shows that the points on an indifference curve are not transitive.”If indifference is not transitive”, observes Armstrong, “the text book diagrams with their masses of non-intersecting indifference curves do not make sense.” Thus the very notion of ‘indifference’ appears to be of doubtful validity.

5. The Consumer is not Rational:

The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.

6. Combinations are not based on any Principle:

Since the combinations are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not possess any significance for the consumer.

7. Limited Analysis of Consumer’s Behaviour:

Further, the assumption that the consumer buys more units of the same good when its price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of “conspicuous consumption” and wants to display or to have variety. Changes in the tastes of the consumer or his indulging in speculative purchases also affects his preference for the goods. These exceptions make the indifference analysis a limited study of consumer behaviour.

8. Failure to consider some other Factors concerning Consumer Behaviour:
The indifference curve analysis does not consider speculative demand, interdependence of the preferences of consumers in the form of snob, Veblen and Bandwagon effects, the effects of advertising, of stocks, etc.

9. Two-Goods Model Unrealistic:
Again, the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants. But the difficulty is that in the case of more than three goods geometry fails and economists will have to depend upon complicated mathematical solutions for analysing the problem of consumer behaviour.

10. Fails to Explain Consumer’s Behaviour in Choices Involving Risk or Uncertainty:
Another serious criticism levelled against the preference hypothesis is that it fails to explain consumer behaviour when the individual is faced with choices involving risk or uncertainty of expectations. If there are three situations, A, В and C, the consumer prefers A to В and С to A and out of which A is certain but the chances of occurring В or С are 50-50 . In such a situation, the consumer’s preference for С over A can only be measured quantitatively.

11. Based on Unrealistic Assumption of Perfect Competition:
The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas, in reality, the consumer is confronted with differentiated products and monopolistic competition. Since the indifference hypothesis is based on unwarranted assumptions, it becomes unrealistic.

12. All Commodities are not Divisible:
The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radios, etc. are indivisible. To have 3½ watches or 2½ cars or 1½ radios in any combination is unrealistic. When indivisible goods are taken in a combination, they cannot be substituted without dividing them. Thus the consumer cannot get maximum satisfaction from the use of indivisible goods.

Despite these criticisms, the indifference curve technique is still regarded superior to the Marshallian introspective cardinalism.

2) Write short note on Budget constraint and utility maximization
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.
The same principle of budget constraint can also be applied to time. If you are a manager, your employees only have a certain number of hours in a workday, which means you need to determine how much of their time they should spend on the various things they need to accomplish. The calculation may vary from week to week as your business priorities change and your employees’ available time adjusts since some weeks include holidays or employees might take time off.

UTILITY MAXIMIZATION
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit. The concept of utility maximization was developed by the utilitarian philosophers Jeremy Bentham and John Stuart Mill. It was incorporated into economics by English economist Alfred Marshall. An assumption in classical economics is that the cost of a product that a consumer is willing to pay is an approximation of the maximum utility that they receive from the purchased good. The combination of goods or services that maximize utility is determined by comparing the marginal utility of two choices and finding the alternative with the highest total utility within the budget limit. The decision is influenced by the option that produces a higher level of satisfaction. This explains how companies and individuals develop consumption habits.

The consumer may consider purchasing more of one item and less of another. Through maximizing utility, the consumer will buy an item that produces the greatest marginal utility with the least amount of spending.

For example, if product ‘A’ comes with twice more marginal utility than product ‘B,’ that means product ‘A’ is providing more marginal utility per dollar than ‘B.’ As a result, the consumer may decide to buy more of product ‘A.’

3) Extensively discuss the Cobweb theory.

Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory

In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)

If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
If supply is reduced, then this will cause the price to rise.
If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Cobweb theory and price divergence

Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)

cobweb-increasing-volatility-price

If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

Cobweb theory and price convergence

cobweb-theory-decreasing-volatility

At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium

Limitations of Cobweb theory

Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Possible examples of Cobweb theory

Housing

Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

1) Briefly discuss the indifference curve(including its assumptions and criticisms).
An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility. An indifference schedule is a list of combinations of two goods, the list being so arranged that the consumer is indifferent to the combinations, preferring none of the other. A standard indifference curve analysis operates using a two dimensional chart.
Following are the features of indifference curve
(a) INDIFFERENCE CURVE ALWAYS SLOPES DOWNWARDS FROM LEFT TO RIGHT
An indifference curve has a negative slope, i.e. it slopes downward from left to right.
Reason: If a consumer decides to have one more unit of a commodity
(say apples), quantity of another good (say oranges) must fall so that the total satisfaction (utility) remains same.
(b) INDIFFERENCE CURVE IS ALWAYS CONVEX TO THE ORIGIN
IC is strictly Convex to origin i.e. MRSxy is always diminishing
Reason: Due to the law of diminishing marginal utility a consumer is always willing to sacrifice lesser units of a commodity for every additional unit of another good.
(c) HIGHER INDIFFERENCE CURVE REPRESENTS
HIGHER LEVEL OF SATISFACTION
Higher indifference curve represents larger bundles of goods i.e. bundles which contain more of both or more of at least one.
It is assumed that consumer’s preferences are monotonic i.e. he always prefers larger bundle as it gives him higher satisfaction.
ASSUMPTIONS OF INDIFFERENCE CURVE
(1) The consumer acts rationally so as to maximise satisfaction.

(2) There are two goods X and Y.

(3) The consumer possesses complete information about the prices of the goods in the market.

4) The prices of the two goods are given.

(5) The consumer’s tastes, habits and income remain the same throughout the analysis.

(6) He prefers more of X to less of У or more of Y to less of X.

(7) An indifference curve is negatively inclined sloping downward.

8) An indifference curve is always convex to the origin.

(9) An indifference curve is smooth and continuous which means that the two goods are highly divisible and those levels of satisfaction also change in a continuous manner.

(10) The consumer arranges the two goods in a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods. He is supposed to rank them in his order of preference and can state if he prefers one combination to the other or is indifferent between them.

(11) Both preference and indifference are transitive. It means that if combination A is preferable to В, and В to C, then A is preferable to C. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C. This is an important assumption for making consistent choices among a large number of combinations.

CRITICISMS OF INDIFFERENCE CURVE
1. Cardinal Measurement implicit in l.C. Technique:
Prof. Robertson further points out that the cardinal measurement of utility is implicit in the indifference hypothesis when we analyse substitutes and complements. It is assumed in their case that the consumer is capable of regarding a change in one situation to be preferable to another change in another situation. To explain it, Robertson takes three situations A, В and C, as shown in Figure I2.38. Suppose the consumer compares one change in situation AB with another change in situation BC.
He prefers the change AB more highly than the change BC. If another point D is taken, then he prefers the change AD as highly as the change DC. This, according to Robertson, is equivalent to saying that the space AC is twice the space AD and we are back in the world of cardinal measurement of utility. Thus when changes in two situations are compared as in the case of substitutes and complements, it leads to the cardinal measurement of utility.
2. Midway House:
Indifference curves are hypothetical because they are not subject to direct measurements. Although consumer choices are grouped in combinations on the ordinal scale, no operational method has been devised so far to measure the exact shape of an indifference curve. This stems from the fact that ‘the peculiar logical structure of the theory has low empiric content.’ The failure of Hicks to present a scientific approach to the consumer’s behaviour led Schumpeter to characterize the indifference analysis as a ‘midway house;’. He remarked: “From a practical standpoint we are not much better off when drawing purely imaginary indifference curves than we are when speaking of purely imaginary utility functions.”

3. Fails to Explain the Observed Behaviour of the Consumer:
Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation. In fact, what we observe is the composite price effect. Similarly, the theory of complementaries and substitutes based on the principle of marginal rate of substitution cannot be discovered from the market data. Samuelson has explained the observed behaviour of the consumer in his Revealed Preference Theory.
4. Indifference Curves are Non-transitive:
One of the greatest critics of the indifference hypothesis is W.E. Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations. He further opines that any two points on an indifference curve are the points of indifference not because they are of iso-utility but of zero-utility difference.
It is only when utility difference is zero that the relation between any two or more points on an indifference curve is symmetrical. Armstrong’s arguments can be explained with the help of Figure 12.39 where on I1 curve points P, Q, R and S represent different combinations of the goods X and Y. The points P and Q, R and S are so drawn that the difference between each pair is imperceptible.
Points P and Q or R and S will be of iso-utility only if utility difference between them is zero. But the consumer cannot be indifferent between P and R because the difference of total utility between P and R is perceptible. So the consumer will prefer P to R, or R to P in the reverse case. This shows that the points on an indifference curve are not transitive.”If indifference is not transitive”, observes Armstrong, “the text book diagrams with their masses of non-intersecting indifference curves do not make sense.” Thus the very notion of ‘indifference’ appears to be of doubtful validity.

5. The Consumer is not Rational:

The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.

6. Combinations are not based on any Principle:

Since the combinations are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not possess any significance for the consumer.

7. Limited Analysis of Consumer’s Behaviour:

Further, the assumption that the consumer buys more units of the same good when its price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of “conspicuous consumption” and wants to display or to have variety. Changes in the tastes of the consumer or his indulging in speculative purchases also affects his preference for the goods. These exceptions make the indifference analysis a limited study of consumer behaviour.

8. Failure to consider some other Factors concerning Consumer Behaviour:
The indifference curve analysis does not consider speculative demand, interdependence of the preferences of consumers in the form of snob, Veblen and Bandwagon effects, the effects of advertising, of stocks, etc.

9. Two-Goods Model Unrealistic:
Again, the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants. But the difficulty is that in the case of more than three goods geometry fails and economists will have to depend upon complicated mathematical solutions for analysing the problem of consumer behaviour.

10. Fails to Explain Consumer’s Behaviour in Choices Involving Risk or Uncertainty:
Another serious criticism levelled against the preference hypothesis is that it fails to explain consumer behaviour when the individual is faced with choices involving risk or uncertainty of expectations. If there are three situations, A, В and C, the consumer prefers A to В and С to A and out of which A is certain but the chances of occurring В or С are 50-50 . In such a situation, the consumer’s preference for С over A can only be measured quantitatively.

11. Based on Unrealistic Assumption of Perfect Competition:
The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas, in reality, the consumer is confronted with differentiated products and monopolistic competition. Since the indifference hypothesis is based on unwarranted assumptions, it becomes unrealistic.

12. All Commodities are not Divisible:
The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radios, etc. are indivisible. To have 3½ watches or 2½ cars or 1½ radios in any combination is unrealistic. When indivisible goods are taken in a combination, they cannot be substituted without dividing them. Thus the consumer cannot get maximum satisfaction from the use of indivisible goods.

Despite these criticisms, the indifference curve technique is still regarded superior to the Marshallian introspective cardinalism.

2) Write short note on Budget constraint and utility maximization
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.
The same principle of budget constraint can also be applied to time. If you are a manager, your employees only have a certain number of hours in a workday, which means you need to determine how much of their time they should spend on the various things they need to accomplish. The calculation may vary from week to week as your business priorities change and your employees’ available time adjusts since some weeks include holidays or employees might take time off.

UTILITY MAXIMIZATION
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit. The concept of utility maximization was developed by the utilitarian philosophers Jeremy Bentham and John Stuart Mill. It was incorporated into economics by English economist Alfred Marshall. An assumption in classical economics is that the cost of a product that a consumer is willing to pay is an approximation of the maximum utility that they receive from the purchased good. The combination of goods or services that maximize utility is determined by comparing the marginal utility of two choices and finding the alternative with the highest total utility within the budget limit. The decision is influenced by the option that produces a higher level of satisfaction. This explains how companies and individuals develop consumption habits.

The consumer may consider purchasing more of one item and less of another. Through maximizing utility, the consumer will buy an item that produces the greatest marginal utility with the least amount of spending.

For example, if product ‘A’ comes with twice more marginal utility than product ‘B,’ that means product ‘A’ is providing more marginal utility per dollar than ‘B.’ As a result, the consumer may decide to buy more of product ‘A.’

3) Extensively discuss the Cobweb theory.

Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory

In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)

If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
If supply is reduced, then this will cause the price to rise.
If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Cobweb theory and price divergence

Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)

cobweb-increasing-volatility-price

If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

Cobweb theory and price convergence

cobweb-theory-decreasing-volatility

At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium

Limitations of Cobweb theory

Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Possible examples of Cobweb theory

Housing

Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

NAME: Chukwuma ogochukwu susan
Reg no: 2020/242910
Dept: combined social science (Eco/pol)

1)DEFINITION OF INDIFFERENCE CURVE
an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer.
There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map. The slope of an indifference curve is called the MRS (marginal rate of substitution), and it indicates how much of good y must be sacrificed to keep the utility constant if good x is increased by one unit. Given a utility function u(x,y), to calculate the MRS, we simply take the partial derivative of the function u with respect to good x and divide it by the partial derivative of the function u with respect to good y. If the marginal rate of substitution is diminishing along an indifference curve, that is the magnitude of the slope is decreasing or becoming less steep, then the preference is convex.
ASSUMPTIONS OF INDEPENDENCE CURVE
(1)There are two goods X and Y.
(2) The consumer possesses complete information about the prices of the goods in the market.
(3) The prices of the two goods are given.
(4) The consumer’s tastes, habits and income remain the same throughout the analysis.
(5)He prefers more of X to less of У or more of Y to less of X.

CRITICISM
Indifference curves inherit the criticisms directed at utility more generally.
Herbert Hovenkamp (1991)has argued that the presence of an endowment effect has significant implications for law and economics, particularly in regard to welfare economics. He argues that the presence of an endowment effect indicates that a person has no indifference curve (see however Hanemann, 1991rendering the neoclassical tools of welfare analysis useless, concluding that courts should instead use WTA as a measure of value. Fischel (1995)however, raises the counterpoint that using WTA as a measure of value would deter the development of a nation’s infrastructure and economic growth.
Austrian economist Murray Rothbard criticised the indifference curve as “never by definition exhibited in action, in actual exchanges, and is therefore unknowable and objectively meaningless.

2) WHAT IS BUDGET CONSTRAINT
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.
The same principle of budget constraint can also be applied to time. If you are a manager, your employees only have a certain number of hours in a workday, which means you need to determine how much of their time they should spend on the various things they need to accomplish. The calculation may vary from week to week as your business priorities change and your employees’ available time adjusts since some weeks include holidays or employees might take time off.
How do budget constraints work?
When calculating budget constraints, you normally have a number of things under consideration for which you are trying to budget. However, it’s easier to understand how budget constraints work if you just consider two sets of items. You could spend your entire budget on item one, or you could spend it all on item two. Alternatively, you could buy a combination of some of item one and some of item two. The proportions of each item you purchase would be constrained by your budget.
Budget constraint equation
You can use the following equation to help calculate budget constraint:
(P1 x Q1) + (P2 x Q2) = m
In this equation, P1 is the cost of the first item, P2 is the cost of the second item and m is the amount of money available. Q1 and Q2 represent the quantity of each item you are purchasing. You could express this equation verbally by saying that the cost of the total number of X items added to the cost of the total number of Y items must equal the amount of money or income you have available.

What is Utility Maximization?
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.

Understanding Utility Maximization
The combination of goods or services that maximize utility is determined by comparing the marginal utility of two choices and finding the alternative with the highest total utility within the budget limit. The decision is influenced by the option that produces a higher level of satisfaction. This explains how companies and individuals develop consumption habits.
The consumer may consider purchasing more of one item and less of another. Through maximizing utility, the consumer will buy an item that produces the greatest marginal utility with the least amount of spending.

3) COBWEB THEORY
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
ASSUMPTIONS OF COBWEB THEORY
1)In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
2) A key determinant of supply will be the price from the previous year.
3) A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Limitations of Cobweb theory
1)Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
2)Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
3)It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.
Possible examples of Cobweb theory
Housing
Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

Name: Aloka Anita Nneka
Reg number:2020/242953
Dept: Combined Social sciences (Eco/Psy)
Indifference curve:Adopted the concept of ordinal utility. the combination of two goods X and Y is different quantity that provides the same satisfaction.
Assumptions:
it assumes that consumer acts rationally to maximize satisfaction.
assume that there are two goods X and Y.
prices of two goods are given.
consumer taste and income remain the same throughout the analysis.
Budget Constraints:
also know as budget line or price line.
is the total amount of items you can afford within a current budget.

1) INDIFFERENCE CURVE
Its one of the main tools, which is used in this analysis to examine consumer behaviour
It shows;
The various commodity combinations which give satisfaction.
There are commodity combinations that give the same level of satisfaction, even if the commodity combinations is different.

Maps of indifference curve
It shows the ranked preference of the consumer combinations of commodities lying on a higher indifference curve yield a higher level of satisfaction than the lower indifference curve.
Among the various combinations, we can identify bundle of goods, which yield the same utility.

Properties
I) An indifference curve has a negative slope.
II) The indifference curve of a rational consumer is convex towards the origin.
III) Indifference curve can not intersect with each other.

Assumptions
I) Rationality
II) Utility is ordinal
III) Consistency and transitivity of choice
Iv) The diminishing marginal rate of substitution.

Criticism
I) Unrealistic assumption: It’s based on Unrealistic assumption of Rationality, perfect competition, divisibility of goods.
II) No novelty: It merely gave new names to old terms. E.g The concept of utility is replaced by scale of preferences.
III) Indifference curve is non – transitive.
Iv) Fails to explain risky choice
v) Absurd and unrealistic combinations.

2) BUDGET CONSTRAINTS
This occurs when a consumer is limited in consumption patterns by a certain income. When looking at a demand schedule we often consider effective demand. Effective demand is what people are actually able to spend given their limitations of income.
Temporary budget constraints can be overcome by borrowing, but in the long term budget constraints are determined by income such as rent and wages.
It’s governed by income on one hand- how much money a consumer has available to spend on consumption and the prices of goods the consumer purchases on the other hand.

UTILITY MAXIMIZATION
It refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions. E.g when deciding how to spend a fixed sum, individuals will purchase the combinations of goods and services that give the most satisfaction.
How individuals achieve utility
A consumer will consumer a good up to the point where the marginal utility is greater than or equal to the price.
When choosing between different goods, the equi – marginal principle argues that consumers will maximize total utility from their incomes by consuming that combinations of goods where:
MUa = Pa

3) THE COBWEB THEORY
The Cobweb Theorem attempts to explain the regularly recurring cycles in the output and prices of farm products. Frankly speaking, it is not a business cycle theory for it relates only to the farming sector of the economy. In 1930 Cobweb Theory was advanced by the three economists in Italy.
Netherlands and the United States, apparently independently of each other almost at the same time. The names of Henery Schultz. (U.S.A.), Jam Tinbergen (Netherland) and Althus Hanau (Italy) are associated with’ the theory, although the term Cobweb Theory was first suggested by Professor Nicholas Kaldor in 1934. It was so named because the pattern traced by the prices and output move­ments resembled a cobweb. The Cobweb Theory of trade cycle is based upon the foundation of ‘lag’ concept.
It asserts that supply adjusts itself to changing conditions of demand which arc manifested through price changes not instantaneously but after certain period. This time, taken by the supply to adjust itself to changes in demand is known as lag.
Thus the quantity supplied during any given time period is the function of the price prevailed in earlier time period to while the demand depends upon the price that prevails in period t itself. The core of this theory is that the response of supply to price ranges is not instantaneous.

The Cobweb Theory of trade cycle has its chief application in the case of agricultural products the supply of which can be increased or decreased with certain time-lag. Most crops can be sown and reaped only once a year. For instance, if the price of wheat increases say in September 2007 then supply will not increase instantaneously.
The farmer will, of course, devote larger farm acreage to wheat cultivation in the next crop season and so it will take one year before supply increases in response to increase in wheat price. Thus the supply of wheat in 2008 will depend upon the price of wheat that prevailed in 2007 which offered the farmer inducement to devote more land to wheat cultivation.

Assumptions of Cobweb Theory:
This theorem is based on three assumptions:

(i) Perfect competition in which each producer assumes that present prices will continue and that his own production plans will not affect the market,
(ii) Price is completely a function of the preceding period’s supply
(iii) The commodity concerned is perishable. These assumptions show that the theory is particularly applicable to agricultural products.
Since the supply in farming is slow to adjust itself to changes in demand and, violent fluctuations in prices and outputs are most likely to occur. For instance, an increase in demand will at once result in a spiral rise in price, since in the short period there can be no increase in supply. This high price may make farmers increase their outputs to a greater degree than is justified by the increase in demand.
Consequently when this increased supply comes to the market, there will be a sharp fall in price which may then result in a reduction in output in the next period to a greater extent again than is justified. The result is that violent changes in output succeed price longer in farm products.
Professor Tinbergen has extended the application of Cobweb’s analysis to durable goods the supply of which responds to demand changes after a significant time-lag because on account of long “gestation period”, there is a considerable lag between the decision to produce and the actual deliveries of the durable goods.

Cobwebs have been divided into:
(1) Continuous Cobwebs,
(2) Divergent Cobwebs, and
(3) Convergent Cobwebs.

In the case of continuous Cobweb the fluctuations in price and output continues repeating about equilibrium at same level. In the case of diverging Cobweb the amplitude of the fluctuation increases with the passage of time. Once disturbed from position of equilibrium the economy moves cumulatively away from it into the doledrums of disequilibrium.
This happens when the slope of the supply curve is less steep than the slops of demand curve. In the case of converging cobweb the economy, if and when disturbed from its equilibrium position, has a tendency to regain it through a series of oscillations. Each fluctuation is more damped than the one preceding it. This narrowing down of the amplitude of the fluctuations occurs when the slope of the supply curve is steeper than the slope of demand curve.

(I) Continuous web
Where the elasticity of supply is equal to the elasticity of demand.
As long as price is completely determined by the current supply, and supply is completely de­termined by the preceding price, fluctuation in price and production will continue in this unchanging pattern indefinitely, without an equilibrium being approached or reached. This is true in this particular case because, the demand curve is the exact reverse of the supply curve so that at their overlap each has the same elasticity. This case has been designated the “case of continuous fluctuations.

(2) Divergent Fluctuation:
Where the elasticity of supply is greater than the elasticity of demand.
Under these conditions the situation might continue to grow more and more unstable, until price fell to absolute zero, or production was completely abandoned, or a limit was reached to available resources (where the elasticity of supply would change) so that production could no longer expand. The case has been designated the “case of divergent fluctuation.”

(3) Convergent Fluctuation:
The reverse situation, with supply less elastic than demand. production and price approach more and more closely to the equilibrium condition where further changes would occur. Of the three case considered thus so far, only this one behaves in the manner assumed by equilibrium theory ; and even it converges rapidly. If the supply curve is markedly less elastic than the demand curve. The case has been designated “the case of convergent fluctuation.

The Cobweb theory of trade cycle represents an important forward step in the devel­opment of the dynamic explanations of the cyclical fluctuations. The earlier approaches to the study of the cycle problem were static in character. They treated the economy as of a point in time ignoring completely the movements of the economy through time.
To the extent the adjustments between supply and demand were assumed to take place instantaneously and not with a certain degree of time lag, the earlier approaches were static and could not furnish useful tools that could be applied with a fair degree of reliance for solving the problem of economic fluctuations in the dynamic economy where adjustments involved lags. The Cobweb Theorem furnishes us with an illustration of the dynamic process of adjustment movements through time.

Criticism of Cobweb Theory:
Like all other theories of trade cycle, the Cobweb Theory too suffers from some severe limitations:

(1) This is not strictly a trade cycle theorem for it is concerned only with the farming sector. There are a good many others sphere of production where it says nothing.

(2) This theorem assumes that the output is solely governed by price. Thus is unrealistic assumption. The fact is that the output particularly of farm products is determined not only by price, but by several other factors—weather, prices of the factors of production.

(3) It is applicable only where:
(a) The price is governed by the supply available,
(b) When production is governed only by the considerations of price as wider perfect competition, and
(c) When production cannot vary before the expiry of one full period.

(4) The theory is based upon the unsound assumption that the crop which farmer plants in 2008 depends solely on the prices ruling in 2007. As a matter of fact this is contrary to facts. When 2007 prices undoubtedly influence decisions regarding 2008 crops, producers are also influenced by their expectations.
Producer’s decisions with regard production during any given period depend not only upon the backward look but also on the forward guess. If this year’s price is high, producers are apt to foresee some reaction to the high price and anticipate larger output by their competitors next year.

(5) This theory of trade cycle suffers from another weakness too. If we look at the Fig 2 showing the diverging cobweb cycle, we find that disequilibrium once began continues indefinitely. The curves show that once the equilibrium is upset, the system falls into a series of unending cycles. In practice, however, this is most unlikely to happen. Commonsense tells that it cannot happen. In practice the shape of the curves is such as to make continued divergence impossible.

(6) It can also be argued that even the constant type of cobweb cycle would not continue indefinitely.

Name: Mbibe Martha Queen
Department: Combined Social Sciences (Economics/Political science)
Reg.Number: 2020/242938
Course: ECO 201(INTRODUCTION TO MICROECONOMICS I).

QUESTIONS
Briefly discuss the indifference curve (its Assumptions and Criticisms)
Write short notes on Budget constraints and utility maximization.
Extensively discuss the Cobweb Theory.

ANSWERS

THE INDIFFERENCE CURVE
The indifference curve is a graphical representation of the concept of utility in economics. It shows all the possible contributions of two goods that provide the same level of satisfaction or utility to a consumer. The indifference curve is a fundamental tool in microeconomic theory and it Is used to analyze consumer behavior.
ASSUMPTIONS OF INDEFFERENCE INCLUDE:
Rationality: The consumer is rational and seeks to maximize their utility.
Continuity: The consumer’s preferences are continuous and can be represented by a smooth curve.
Diminishing Marginal Rate of Substitution (MRS): The consumer’s willingness to give up one good for another good decrease as they consume more of each good.
Transitivity: The consumer’s preferences are consistent and transitive. If a consumer prefers A to B and B to C, then they also prefer C to A.
Non-satiation: The consumer always wants more of both goods and does not become satiated or tired of consumption.

CRITICISMS OF INDEFFERENCE CURVE INCLUDE:
The indifference curve assumes that the consumer’s preferences are stable and do not change over time. However, this may not always be the case, as preference can change due to factors such as advertising , personal experience, or social norms.
The assumptions if diminishing marginal utility nay not always hold true, especially for luxury goods where the consumer may experience increasing marginal utility as they consume more of the good.
The indifference curve model assumes that the consumer has perfect information and can make rational decisions based on that information. In reality, consumers may have imperfect information and make decisions based on incorrect or inaccurate information.
The model assumes that the consumer has a fixed income and does not take into account changes in income or price levels, which can significantly their consumption decisions.

Despite these criticisms, the indifference curve remains a valuable tool in microeconomic analysis and is widely used in consumer theory and welfare economics.

BUDGET CONSTRAINT AND UTILITY MAXIMIZATION
BUDGET CONSTRAINT

Budget constraint is an essential concept in economics that reflects the ideas that consumers face a limited amount of income and must allocate it efficiently among goods and services. It is a constraint that limits the set of consumption choices available to a consumer.
Assuming two goods, X and Y, the budget constraint can be represented as an equation.

PXX + PYY = M

Where PX and PY are the prices of goods X and Y, M is the consumer’s income, and X and Y are the quantities of each good consumed. The budget constraint equation shows that the total amount spent on goods X and Y cannot exceed the consumer’s income.

UTILITY MAXIMIZATION

Utility maximization is the process by which consumers allocate their limited income among goods in a way that maximizes the total satisfaction or utility. The utility function is a mathematical function that represents a consumer’s preferences over different combinations of goods.
The optimal consumption bundle is the combination of goods that maximizes the consumer’s utility subject to their budget constraint. The optimal bundle occurs where the slope of the indifference curve, representing the consumer’s for a combination of goods, is equal to the slope of the budget constraint line, representing the prices of the goods and the consumer’s income.

Mathematically, this can be represented as:

MUX/ PX = MUY/ PY

Where MUX and MUY are the marginal utilities of goods X and Y, and PX and PY are the prices of goods X and Y. This equation is known as the marginal rate of substitution (MRS), which represents the rate at which the consumer is willing to substitute one good for another.

In summary, the budget constraint and utility maximization are two essential concepts in microeconomics that help us understand how consumers allocate their limited income among goods in a way that maximizes their satisfaction or utility.

THE COBWEB THEORY

The cobweb theory is an economic model that explains the fluctuation in prices and quantities of goods in the market over time. The model assumes that there is a time lag between the production and consumptions of goods, which causes supply and demand to be out of sync, leading to cyclical price and quantity fluctuations.
The cobweb model is typically represented graphically as a series of intersecting lines, with the horizontal axis representing time and the vertical axis representing price or quantity. The model assumes that in the first period, producers make decisions on how much of a good to produce based on the current price of the good. Consumers then make decisions on how much of the good purchase based on the price. In the second period, producers observe the previous period’s price and adjust their production accordingly but there is a time lag.

The cobweb theory is often used to explain the behavior of agricultural markets, where the production cycle is relatively long and unpredictable. However, it can be applied to other markets as well. The theory is based on several key assumptions including:

Producers have a fixed supply curve, meaning they can adjust production quickly in response to change in price.
Consumers have a fixed demand curve, meaning they can adjust consumption quickly in response to change in price.
Producers and consumers from their expectations about future prices based on the current price.
There is a time lag between production and consumption, meaning that changes in production will affect prices in the future.

With these assumptions in mind, the cobweb theory predicts that if the initial price of a good is above the equilibrium price, producers will increase production in response to the high price. However, because of the fixed supply curve, it will take time for the increased production to reach the market. In the meantime, consumers will have formed their expectations about the future price based on the current price and will be willing to pay more for the good. This will cause the price to rise even further, creating a cycle of overproduction and higher prices.
Conversely, if the initial price is below equilibrium price, producers will decrease production in response to the low prices. Again, because of the fixed supply curve, it will take time for the decreased production to reach the market. In the meantime, consumers will form their expectations about the future price based on the current price and will be unwilling to pay as for the good. This will cause the price to fall even further, creating a cycle of underproduction and low prices. The cobweb theory is used in explaining the dynamics of markets with a long time lag between production and consumption. However, it is important to note that the theory relies on several simplifying assumptions and may not hold true in all cases. For example, if producers are able to adjust production quickly in response to change in price, the cycle of overproduction and underproduction may not occur. Similarly, if consumers are able to adjust consumption quickly I response to change in price, the cycle of higher and lower prices may not occur.
Nonetheless, the cobweb theory provides a useful framework for understanding the behavior of markets with a time lag between production and consumption.