Macroeconomics written paper - Assignment Example

Hence, indifference analysis takes into consideration the concept of indifference curves and budget line constraints (Dwivedi, 2010). In the situation above, Commuters consider that Bus journeys are an inferior good while Car journeys are a normal good. The two modes of transport employ economic aspects of transportation to differentiate the two aspects of travelling, which is car travel and Bus travel. Both modes of transportation have their own advantages and disadvantages. Bus travelling is cheaper and perhaps safer compared to car journeys whereas, car journeys are considered much faster, comfortable and convenient when compared top bus travels.

Income is a budgetary constraint and a rise in income will affect consumer behavior according to consumer theory. The income effect as proposed by the consumer theory indicates that a rise in income makes a consumer to have more purchasing power of a product. Increasing income leads to a shift of the budget constraint line out parallel. The relative pricing of the two goods or services, which are, car and bus travel do not change meaning that the gradient of the budget line remains the same.

The income has increased and this means that there is more resources to purchase the same products in more quantities. The new combinations of products that maximize utility can be identified; from this, the impact of income changes on the demand for a product can be analyzed (Friedman, 2007). In summary, economists decompose this effect of change in price on the quantity of the demand into an income and a substitution effect. The income effect theory proposes that due to increase in real income, which is closely related to a fall in prices or the real income associated with a rise in prices.

On the other hand, the substitution effect proposes that due to change in the relative price of the product, cheaper products are substituted for more expensive goods. Two major economists have proposed the effect of price