The indifference curve analysis measures utility ordinally. The consumer has indifference map of good x and good y 2. It is also known as or equal product curve or producers indifference curve. Microeconomics indifference curves flashcards quizlet. This implies that the slope of an indifference curve decreases in absolute terms as we move along the curve from the left downwards to the right.
Conditions to explain equilibrium of the consumer consumer equilibrium under indifference curve analysis to explain the consumers equilibrium the following conditions are there 1. The indifference curve shows the different combinations of two goods that give equal satisfaction and utility to the consumers. It is assumed that the consumer has not reached the point of saturation. It is assumed that individuals are rational in making decisions from their expenditures on consumer goods. At the optimum, the indifference curve is tangent to the budget constraint so their slopes are equal. Thus, the tradeoff between the goods that the individual is willing to undertake mrs. Definition an indifference curve is a curve which shows all the combinations of two products that will provide the consumer with equal levels of satisfaction or utility. Consumers tastes can be related to utility concepts or indifference curves. The whole indifference curve approach is based on the law of substitution which states that the consumption of one commodity is always at the expense of the other.
Theory of ordinal utilityindifference curve analysis. It is a firms counterpart of the consumers indifference curve. Indifference curvesbudget lines a c b d e income 100 income 140 income 124 utility 714 utility 892 q2 q1 economics 101 spring 2001 section 4 hallam exam 2a blue for questions 16 consider the diagram below. This property shows that any increase in the amount of one commodity is accompanied by a reduction in amount of other. 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.
Meaning an indifference curve is a graphical presentation of locus of all such points which shows different combinations of two commodities which gives equal satisfaction to the consumer indifference set it is set of combination of two commodities which offer a consumer the same level of satisfaction. In figure 1 the curved line which passes through commodity bundle a represents an indifference. Indifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. An indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility. According to it when a consumer is presented with a number of various combinations of goods, he can order or rank them in.
Developed by the irishborn british economist francis y. An indifference curve is a collection of all commodity bundles which provide the consumer with the same level of utility. Pdf the thesis of this paper is that when the indifference curve is. See below 17 slopes of indifference curves when more of a commodity is always pre fdth ditiferred, th e commodity is a good. The term consumers equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market the aim of the consumer is to get maximum satisfaction from his money income. What is the importance of the indifference curve analysis. The implication of the transitivity assumption is that indifference curves cant. Indifference curve adopted the concept of ordinal utility instead of cardinal utility. An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. To show the relationship between utility functions, indifference curves, and total utility curves. By setting aside the assumption of putting a numerical valuation on utilityan assumption that many students and economists find uncomfortably unrealistic the.
All points on ic2 are preferred to all points on ic1. Indifference curves are widely used in microeconomics to analyze consumer preferences. Without further assumptions indifference curves can have a strange shape. An indifferent curve is drawn from the indifference schedule of the consumer. Indifference curve technique has rehabilitated the old marshallian concept of consumers surplus that has lain buried almost for decades under the weight of unrealistic and illusory assumptions. The axes of those graphs represent one commodity each e. For this reason, an indifference curve always has a negative slope. However to state y z,y z, we need to add th ti th t i b tt hi h the assumption that more is better, which is called monotonicity or monotonic preferences. An isoquant curve is the representation of a set of locus of different combinations of two inputs labor and capital which yield the same level of output.
There is an indifference curve through every point but we only show some of them. Ic1 represents the indifference set d,c,b,a while ic2 represents the basket or indifference set g,f,e. We have assumed our consumer a rational consumer he always aims at getting the maximum satisfaction utility out of his income taking the prices and other relevant information into account. Edgeworth, it is widely used as an analytical tool in the study of consumer behaviour, particularly as related to consumer demand. In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. The cardinal utility approach, though very useful in studying elementary consumer behavior, is criticized for its unrealistic assumptions vehemently. The properties of these indifference curves reflect the four consumer preference assumptions. Introduction to indifference curves and budget lines. Alexei cares about his exam grade and his free time. Consumers preferences and its assumptions microeconomics. Consumers surplus can be measured with the help of this technique without any need for making. Four properties of indifference curves quickonomics. This is based on consumer preference and believes that we cannot quantitatively measure human satisfaction in monetary terms. Home microeconomics preference theory consumers preferences and its assumptions.
The ordinal utility theory or the indifference curve analysis is based on four main assumptions. Rational consumers according to this theory, a consumer always behaves in a rational manner, i. An indifference curve can be drawn through any point. The properties of indifference curve follow from its definition and the assumptions upon which indifference curve approach is based. Indifference curves are graphs that represent various combinations of two commodities which an individual considers equally valuable. Since an indifference curve represents a set of choices that have the same level of utility, lilly must receive an equal amount of utility, judged according to her personal preferences, from two books and 120 doughnuts point a, from three books and 84 doughnuts point b. Browse more topics under theory of consumer behavior. In order to remain on the same level of satisfaction same indifference curve, the consumer must sacrifice one commodity for another. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. Consumers equilibrium through indifference curve analysis. It implies that the consumer is capable of simply comparing different levels of satisfaction. The consumer has a fixed money income which is spent on x and y 3. Similarly at bundle y, she is consuming y1 units of good 1 and y2 units of good 2.
It doesnt have dependent and independent variables in the sense of there being a cause and effect. Indifference curves and the ordinalist revolution archive ouverte. Definition an indifference curve is a curve which shows all the combinations of two products. Read this article to learn about indifference curves. The indifference curve um has four points labeled on it. The slope of an indifference curve, the mrs, reflects the value placed on the additional unit of a good in terms of the other goods the consumer would be willing to give up. A popular alternative to the marginal utility analysis of demand is the indifference curve analysis. An indifference curve is a locus of all combinations of two goods which yield the same level of satisfaction utility to the consumers. If a curve does not have a negative slope as shown in figure 3, it cannot be an indifference curve. An indifference curve represents a series of combinations between two different economic goods, between which an individual. It is assumed that the consumer has a fixed amount of money, whole of which is to be spent on the two goods, given constant prices of both the goods. An indifference curve is an implicit function that has the amounts of goods as variables. The consumer ranks his preference according to the satisfaction of each combination.
Curvature of indifference curve, which indicates the rate at which the consumer is willing to trade one good for another while maintaining the same level of utility. Indifference curves given the three basic assumptions disussed in the previous section, a consumers tastes and preferences can be indicated by means of an indifference curve. 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. We have seen that his preferences can be represented graphically using indifference curves, and that his willingness to trade off grade points for free timehis marginal rate of substitutionis represented by the slope of the indifference curve. Indifference curve, in economics, graph showing various combinations of two things usually consumer goods that yield equal satisfaction or utility to an individual. Indifference curve analysis is basically an attempt to improve cardinal utility analysis principle of marginal utility. Preferences and utility 5 x 1 y 2 good 2 y good 1 x 2 fig. The food stamps problem 2 indifference curve a collection of points for which the consumer is indifference between. Indifference curve definition, properties, assumptions. Thus the basis of indifference curve approach is the preference indifference hypothesis. Here, the principle of the marginal rate of substitution mrs applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of. The correct and the in correct 17 beers makes both parties better off, since both point g 10 beers and point h 10 apples are preferred to point f 5 of each.
Indifference curve meaning, assumptions,and features youtube. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say x and y. An indifference curve is an implicit function that has the amounts of goods. In other words, the indifference curve is the graphical representation of different combinations of goods generally two, for which the consumers are indifferent, in terms of the overall satisfaction and the utility. Examples of indifference curves apples and bananas \ a b 1 5 7 2 4 3 8 6 i2 i1 examples of indifference curves apples and bananas \ a b 1 5 7 2 4 3 8 6 i2 i1 i3 examples of indifference curves more to come done the basic model of utility maximization some applications to indifference curve we continue this topic in the next.
An indifference curve shows all of the amounts of goods that give the consumer the same level of satisfaction. The socalled lexicographic ordering satisfies assumptions 1 to 4, but each of its indifference sets consist of only one point fig. The group of indifference curves is called an indifference map. Most generally and assuming youre referring to a utility map, it helps us understand the combinations of goods that lead to various levels of utility and most importantly helps us understand which combination maximizes utility subject to a bud. The thesis of this paper is that when the indifference curve is concave to the origin, the optimal point on the budget line is not the corner solution on the highest most north eastern indifference curve, the analysis all too often offered in the literature, but, rather, somewhat paradoxically, the lowest most south western indifference curve.
However, since we use indifference curves to show a consumers choice problem, from the point of view of solving optimisation problems continuity is a. Baumol has taken three main assumptions of nonsatiety, transitivity and diminishing marginal rate of substitution. What are the properties of the indifference curves. Examples of indifference curves kent state university.
This assumption implies that the consumer has not reached the point of. As the consumer increases x by one unit, heshe must sacrifice y to remain at fixed u. The utility function defines the level of utility or satisfaction as a function of the quantities of commodities consumed. Indifference curve analysis 1 indifference curve analysis 1. The indifference curve is so named because the consumer would be indifferent between choosing any one of these commodity bundles. At bundle x, the consumer is consuming x1 units of good 1 and x2 units of good 2. Ppt indifference curve analysis powerpoint presentation. The various assumptions of the analysis are explained below. This approach assigns an order to consumer preferences rather than measure them in terms of money.
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