As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin. The degree of convexity of an indifference curve depends upon the rate of fall in the marginal rate of substitution of X for Y. As stated above, when two goods are perfect substitutes of each other, the indifference curve is a straight line on which marginal rate of substitution remains constant. Straight-line indifference curves of perfect substitutes are shown m Fig. The last property of indifference curve is that a higher indifference curve will represent a higher level of satisfaction than a lower indifference curve. In other words, the combinations which lie on a higher indifference curve will be preferred to the combinations which lie on a lower indifference curve.
This becomes pretty obvious if we look at the indifference map below. To understand why this is the case, we can look at what would happen if they did intersect. As we know, all combinations of good A and good B that lie on the same indifference curve make the https://1investing.in/ consumer equally happy. Thus, all other combinations on both curves would have to provide the same level of satisfaction as well. However, if we compare point B and point C, we can see that point C offers more of good A and good B as compared to point B .
The marginal do not rate of substitution increases nor does it remain constant. The marginal rate of substitution on the contrary goes on diminishing. So the Indifference Curve has to be convex to the origin of axes. If the total satisfaction is to remain the same, the consumer must part with a diminishing number of bananas as he gets as increasing stock of oranges. The loss of satisfaction to the consumer on account of the downward movement must be made up by the gain through the rightward movement.
Thus, In other words, an indifference curve is a curve on which all the combinations of two commodities give a consumer equal satisfaction. A consumer is indifferent towards different four properties of indifference curve combinations located on such a curve. 8.5 two indifference curves are shown intersect each other at point C. Now take point on IC2and point B on indifference curve IC1steeply below A.
- Although the concept of IC is vital to explain the ordinal approach, it is criticised on various grounds.
- The graphical representation of such combinations is termed as indifference curve.
- This means that there cannot be two combinations of goods that provide the same level of satisfaction.
- In the above diagram, IC is an indifference curve, and A and B are two points which represent combination of goods yielding same level of satisfaction.
The greater the fall in marginal rate of substitution, the greater the convexity of the indifference curve. The less the ease with which two goods can be substituted for each other, the greater will be the fall in the marginal rate of substitution. Firstly, the Indifference Curves are not based on the cardinal measurability of utility. Secondly, the rate of substitution between the two commodities need not be the same in all the indifference schedules.
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This is born out of our assumption that the consumer is considering different combinations of two commodities. Every indifference curve to the right of the preceding curve indicates higher level of satisfaction and the curve to the left shows lesser satisfaction. This means that the indifference curve at a higher level from the axes shows greater satisfaction than an indifference curve at a lower level. This can be illustrated by having two indifference curves as given in Figure 2. In the upward sloping curve too, the different points on the curve differ in significance because as he moves from point A to B, he gets more of x and more of y commodities.
In economics, an indifference curve is a graph showing different combinations of two goods that give the consumer equal satisfaction and utility. There are a few key properties of indifference curves that are worth noting. Firstly, they are downward sloping, meaning that as we move along an indifference curve from left to right , we must give up some units of y in order to maintain the same level of utility. This is due to the fact that our resources are finite and so we cannot consume more of one commodity without reducing our consumption of another. If they intersect with each other then consumer’s choices won’t be consistent and transitive.
To understand this, let’s take a close look at Samaira’s situation. The demonstration effect states that an individual’s consumption pattern is affected by the level of consumption of other individuals. This is ignored by IC analysis limiting its use to understand consumer behaviour. It is assumed that the consumer’s behavior is consistent over the period. It means if a consumer, 1ooses combination A over combination B, at a given time, he will not choose combination B over combination A at some other time provided both the combinations are available to him. We have assumed our consumer a rational consumer he always aims at getting the maximum satisfaction out of his income taking the prices and other relevant information into account.
Therefore, the consumer is indifferent to any combination of two commodities if he/she has to make a choice between them. This is because an individual consumes a variety of goods over time and realises that one good can be substituted with another without compromising on the satisfaction level. If it touches X-axis, as I1; in Figure 12.6 at M, the consumer will be having OM quantity of good X and none of Y.
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It denotes that indifference curve technique is based on the axiom of diminishing marginal rate of substitution. Similarly, points A and C on IC2 also give the same level of satisfaction. It means, points B and C should also give the same level of satisfaction. However, this is not possible, as B and C lie on two different indifference curves, IC1 and IC2 respectively and represent different levels of satisfaction. Therefore, two indifference curves cannot intersect each other. MRS refers to the rate at which the commodities can be substituted with each other, so that total satisfaction of the consumer remains the same.
It follows that if a consumer wants to have more quantity of commodity X, he will have to give up some quantity of commodity Y in order to derive the same level of satisfaction. Another characteristic of the indifference curve is that hire the indifference curve higher will be the level of satisfaction. In the above image, the combination outside the budget line represents the one beyond the income. And the bundle inside the slope represents the one easily affordable within the budget. Consumers can rank a combination of commodities based on their satisfaction levels.
In additional words, the mixtures which lie on a higher indifference curve will be favored to the mixtures which lie on a lower indifference curve. Consider indifference curves IC1and indifference curves IC2in Fig. Mixture Q has been taken on a higher indifference curve indifference curve IC2 and mixture S on a lower indifference curve IC1. The third important property of the indifference curve is that the indifferent curves do not intersect with each other. This is because all the points on the single indifference curve provides the same level of satisfaction to the consumer. This means that the lower indifference curve will have the same level of utility throughout the curve.
Only convex curves will lend to the principles of Diminishing Marginal Rate of substitution. In the case of concave curve, it will lead to increasing marginal rate of substitution which is impossible. But as a special case it will touch the Y axis at point A if the combination is between Money and Commodity as shown in the Figure 4. It would then mean that the consumer either wants various combinations of money and commodity or only OA units of money which gives him command over commodity X. Since K is common to both the curves, points S and T show equal satisfaction. But this is contrary to our earlier assumption that points on a higher indifference curve show greater satisfaction than points on lower indifference curves.
The figure above, consisting of three Indifference Curves, speculates the view that a consumer is indifferent to the combinations of products on the same Indifference Curve. Also, a consumer, say Samaira, would prefer the combinations on the higher Indifference Curve to the ones on the lower curves. A higher Indifference Curve indicates higher levels of satisfaction – combinations on IC2 yield greater satisfaction than those on IC1.
Characteristics of Indifference Curves (with diagram)
So, the consumer is said to be indifferent between the combinations located on Indifference Curve ‘IC1’. The combinations P, Q, R, S and T give equal satisfaction to the consumer and therefore he is indifferent among them. Whether he is indifferent between apples and bananas, i.e. both are equally preferable and both of them give him same level of satisfaction. If the consumer increases his consumption beyond X or K, total utility will fall. If he increases his consumption of X so as to reach the dotted portion of the I1 curve , he gets negative utility.
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. In microeconomics, indifference curve is an important tool of analysis in the study of consumer behavior. Draw a consumer’s indifference curves for orange juice and chicken rice . Ist and briefly explain each of the four properties of indifference curves.
Correspondingly, the equilibrium point will also shift the right words as shown in the following figure. Grapes are priced at $6 per kg whereas apples are priced at $5 per kg. The shape of the curve is determined by the rate of substitution between the two commodities. We can make certain realistic assumptions about the shape of the Indifference curves. It tries to solve how does a consumer reaches the equilibrium point without measuring the utility in Cardinal numbers. She is thus prepared to surrender 2 days of snowboarding for a second day of horseback using.
The total satisfaction of the consumer is therefore bound to be greater at Q than at P. Here, the consumer is assumed to spend on both the products by checking out all the possible combinations deriving the same utility to him. Therefore, no product quantity can be zero, which means the line cannot cut on the axes. It is the slope of the indifference curve depending upon the willingness of a consumer to sacrifice one commodity for another. Figure 6 shows an indifference curve that is concave to the origin.
Indifference curves are convex to the origin .The slope of the curve is referred because the Marginal Rate of Substitution. At the utility-maximizing answer, the consumer’s marginal fee of substitution is equal to the worth ratio of the 2 goods. The solution at Z includes a rise in the number of days Ms. Bain spends horseback using. Notice that only the value of horseback using has changed; all other options of the utility-maximizing answer stay the identical.
Properties of indifference curve
The indifference curves have a number of attributes and interesting properties which have come to be known as characteristic features or properties of indifference curves. A position in which the consumer reaches the highest level of satisfaction, Given his money income and the prices of the two commodities. Explanation of consumer’s Equilibrium with the help of indifference curve analysis. An Indifference curve is a geometrical representation of a consumer’s scale of preferences. As we know that all indifference curve slope downward to right or they have negative slopes. If the indifference curve touches the vertical line(OY-axis) then he will consume a very large quantity of commodity Y while zero quantity of commodity-X.
This means that as you move down an indifference curve, the amount of one good required to maintain a given level of satisfaction increases at a diminishing rate. In other words, it takes increasingly more units of Good A to make up for a unit lost of Good B. This means that as you move from left to right along an indifference curve, the amount of the good or service on the x-axis decreases while the amount of the good or service on the y-axis increases. This is because people generally prefer more of both goods or services rather than less. If they did, it would mean that someone could be better off by switching from one point to another on the graph – which contradicts the second property above.
The theory was developed so that analysis of economic choice could be used preference, that can be observed, rather than the older concept of utility. It represents the same level of satisfaction of a consumer from different bundles of commodities i.e. the satisfaction or pleasure that a consumer can get leftovers the identical lengthways of an IC. The above assumptions and properties of the indifference curve have explained its concept clearly.