Indifferencial Curve,

Budget Line &

Production cost

By : Anastasia Della Minerva

The Indifference Curve and the budget line will discuss the consumption
behavior of the two types of goods and the constraints/limitations in
consuming them. The consumer's decision to consume goods in order to
achieve satisfaction/benefit/utility. the number of goods consumed (as a
form of consumer decisions) with the level of satisfaction (utility)
obtained are interrelated. In the ordinal approach, utility can be
compared.
 Indifference Curve

Definition: 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.

Source: The Economic Times

The three indifference curves (IC) show the
prevailing assumptions. The first assumption
is that the farther from the origin, the higher
the level of satisfaction. From IC 1, IC 2, IC 3,
the one with the highest level of satisfaction is
the consumption combination at IC 3, while
the indifference curve with the consumption
combination that gives the lowest level of
satisfaction is at IC 1. And the indifference
curve is made from top left to right down and
convex towards the origin. And the three
indifference curves above do not intersect with
each other. IC 1, IC 2, and IC 3 should not
intersect with each other.
The
The higher
higher of
of income,
income, the
the higher
higher thethe
indifference
indifference curve that can
curve that can be be
achieved.
achieved. So
So the
the budget
budget becomes
becomes aa
limitation
limitation in consuming goods
in consuming goods andand
services.
services. For this reason, it
For this reason, it is
is also
also
The classic indifference curve is drawn downward from left to
necessary
necessary toto learn
learn about
about the
the Budget
Budget
Line
Line to find out consumer behavior.
to find out consumer behavior. right and convex to the origin, so that a consumer who is given a
choice between any two points on it would not prefer one point
over the other. Because all of the combinations of goods
represented by the points are equally desirable, the consumer
would be indifferent to the combination actually received. An
indifference curve is always constructed on the assumption that,
other things being equal, certain factors remain constant.

Source: Britannica.com
 Budget Line

Budget line is a curve that describes the

combination of consumption of two types of
goods that require the same budget (cost).
Combination of consumption that can be
obtained by consumers with their income
The budget line is shown by the blue line.
Along the line the budget shows the same
costs. So that consumers can choose a
combination of two kinds of goods in
consumption.
 Consumer Budget Line

• Various points on the budget constraint line indicate

consumer combinations or trade-offs between the two
goods.
• For example, if the customer doesn't buy pizza, he can buy
500 cans of Pepsi. If he doesn't buy Pepsi, he can buy 100
pizzas.
 Production Cost

Production costs are costs that must be incurred by companies to produce

goods or services. The calculation of production costs is carried out from
the beginning of processing raw materials, to finished or semi-finished
goods. The calculation of production costs is complex, because there are
several components of expenditure that must be calculated. The total
costs incurred for the production process are called production costs.
production cost is one of the components in the Income Statement.

Source: money.kompas.com
 2 Types Of Production Costs

● Explicit costs, namely all costs incurred to obtain the factors of

production.

● Implicit costs, are the estimated expenditure on the factors of production

owned by the company.

Not all company expenses can be called production costs. This is because
expenses that can be called production costs must be directly related to
the company's income.
Types of production costs In general, there are 3 types of production costs in the
company's accounting records :
Raw material costs or
direct material production
costs are costs incurred
by companies to
purchase and process
raw materials into
finished goods. For
example, a garment
company. The company
incurs costs for the
purchase of raw materials
in the form of cloth to be
processed into finished
goods. All these costs are
referred to as raw
material costs.
Labor costs are costs
incurred by the company
to pay labor wages. This
cost is also known as
direct labor. However,
direct labor from
production costs is only to
calculate labor directly
related to the production
process.
Overhead costs are
costs incurred to support
the production process.
These overhead costs
are not directly related to
the production process,
but help smooth the
production process.
Some examples of
overhead costs in
production costs are the
cost of purchasing
stationery, security
personnel costs,
electricity costs, rental
costs, and so on.
Source: Journal.id
Thank You!