Practise decomposing a price change into substitution and income effects on indifference-curve diagrams and comparing normal, inferior and Giffen-good demand responses.
With the help of a diagram, evaluate the use of indifference curve analysis to explain the relationship between a change in the price of a product and the change in an individual consumer's demand for this product.
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Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.
AO 1 and AO 2 out of 14 marks. AO3 out of 6 marks.
Indicative content
Responses may include:
AO1 Knowledge and understanding and AO2 Analysis
- An explanation of what is meant by an indifference curve and an indifference curve map.
- Explanation of a budget line and understanding of how a change in price or how a change in real income will affect a budget line
- Demonstration of an understanding of consumer equilibrium.
- Use of a diagram to analyse the links between indifference curves, budget lines and consumer equilibrium.
- Analysis of how a change in price might affect consumer equilibrium. This can be supported by a clear, accurately labelled diagram.
- Analysis of each element of the price effect on individual consumer demand. Both substitution effects and real income effects should be considered to attain Level 3
No diagram-highest mark is L2-8
AO3 Evaluation
- Recognise that the key assumptions regarding human behaviour will determine the shape of the indifference curve. For example, it is assumed that all consumers attempt to maximise satisfaction.
- Although the analysis only considers 'bundles' of two good consumed, it still assumes the consumer can correctly distinguish between different levels of satisfaction between different 'bundles'.
- The analysis only considers a choice between two goods. Consumers have the opportunity to consider alternative prices of a wide range of goods before choosing what to purchase.
- Other factors such as advertising might change consumer taste, which in turn, will change the shape of the indifference curve and, ultimately the final impact of a price change on consumer demand.
- A conclusion should be attempted which examines the effectiveness of the use of indifference curve analysis to predict the impact of a price change on individual consumer demand.
Accept all valid responses
2
AO1 Knowledge and understanding and AO2 Analysis
AO3 Evaluation
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