Indifference Curve Analysis Microeconomics

The level of satisfaction of consumer for any given combination of two commodities is same for a consumer throughout the curve. As mentioned previously, the concept of indifference curve is based on the properties of diminishing marginal rate of substitution. When the indifference curve is convex to the origin, MRS diminishes as more of X is substituted for K.

We are not yet in a position to say much about the policy itself, but we have one piece of the model we will use to analyze it. With this indifference curve, we can move on to the other pieces of the model that we will study in chapters 2, 3, and 4. Now we can ask what bundles are better, worse, or the same in terms of satisfying this college student. Clearly, bundles that contain fewer of both goods, like Bundle D, are worse than A, B, or C because they violate the more-is-better assumption.

This property of indifference curves follows from assumption 3, which is that the marginal rate of substitution of X for Y (MRSxy) diminishes as more and more of X is substituted for Y. Point Z, with 3 days of skiing and 4 days of horseback riding, provides more of both activities than point X; Z therefore yields a higher level of utility. In general, any combination that lies above and to the right of an indifference curve is preferred to any point on the indifference curve. In figure 1.6, when we start with a bundle of one iPod and one set of earbuds (as in bundle A), what are the other bundles that are just as good to the consumer?

  • Consumer tastes, for example, might change dramatically over time, rendering accurate indifference curves useless.
  • Now suppose the price of horseback riding falls by half, to $25.
  • It is certainly the case that more is not worse in that situation, and so to keep things simple, we’ll maintain the standard assumption that we prefer more of a good than less.
  • If and only if indifference curves are strictly convex, they are smooth.

You should understand, when graphically represented, that the indifference curve for standard preferences lies between perfect complements and perfect substitutes. Notice that figure 1.5 illustrates a change in the good on the vertical axis (sandwiches) over the change in the good on the horizontal axis (burritos). From this discussion and graph, it should be clear that the MRS is the same as the slope of the indifference curve at any given point along it. Notice that figure 1.1 includes several indifference curves. Each curve represents a different level of overall satisfaction that the student can achieve via burrito/sandwich bundles.

Indifference Curves are negatively sloped

For bundles with a given amount of x1 — that is, bundles lying on the vertical line through X — those to the north are preferred to those to the south. As can be seen above, a budget line shows all possible combinations of two goods that a consumer can buy within the funds available to him at the given prices of the goods. All combinations that are within his reach lie on the budget line. Since points A and B lie on IC1, they give the same satisfaction level to an individual. Similarly, points A and C give the same satisfaction level, as they lie on IC2. Therefore, we can imply that B and C offer the same level of satisfaction, which is logically absurd.

  • Note also that one of the ordinality analyses is that consumers have a minimum of two commodities hence opportunity for choice exists.
  • Similarly, at point E, he buys the OE quantity of rice and no beans.
  • Indifference curves indicate complete replaceability, which means they should not overlap in demand, but be parallel.

Given the definition of the indifference curve and the assumptions behind it, the indifference curves cannot intersect with each other. It is because, at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. It is only on the negatively sloped curve that different points representing different combinations of goods X and Y give the same level of satisfaction to make the consumer indifferent. We measure the quantity of rice along the X-axis and beans along the Y-axis. It is shown in the diagram that a consumer may buy 7 kilograms of rice and 12 kilograms of beans or 9 kilograms of rice and 11 kilograms of beans.

Class 12 Economics New Syllabus Complete Notes NEB HSEB

The consumer is indifferent towards points (a) and (b) as they represent an equal level of satisfaction. We will begin our analysis with an algebraic and graphical presentation of the budget constraint. We will then examine a new concept that allows us to draw a map of a consumer’s preferences. Then we can draw some conclusions about the choices a utility-maximizing consumer could be expected to make. You can think of perfect complements and perfect substitutes as polar extremes of preference relations. Figure 1.8 shows how a typical indifference curve lies between perfect complements and perfect substitutes.

Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior. For example, consumer preferences might change between two different points in time, rendering specific indifference curves practically useless. Consumers will always prefer a higher indifference curve to a lower one. This is due to the basic economic assumption that “more is always better“. Think about it if someone were to ask you if you wanted a free slice of pizza or an entire pizza for free, what would you say?

Indifference curves indicate complete replaceability, which means they should not overlap in demand, but be parallel. A good that makes a consumer just as well off as a fixed amount of another good, i.e., Morton and Diamond Crystal are brands of table salt. Goods that consumers want to consume only in fixed proportions, i.e., airpods to an iPhone. A perfect substitute is a good that makes a consumer just as well off as a fixed amount of another good. Perfect complements are goods that consumers want to consume only in fixed proportions. Bundles can contain many goods, but to simplify, we will consider only pairs of goods.

Therefore, the principle of diminishing marginal utility indicates that each additional unit of consumption adds less to the cumulative utility than the previous unit. If they intersect with each other then consumers’ choices won’t be consistent and transitive. These two indifference curves characterize two different levels of satisfaction.

The market asked her to give up only one; she got her extra day of riding at a bargain! Her move along her budget line from point S to point D suggests a very important principle. If a consumer’s indifference curve intersects the budget line, then it will always be possible for the consumer to make exchanges along the budget line that move to a higher indifference curve.

Utility Maximization and Demand

We can draw an indifference curve through any combination of two goods. Figure 7.11 shows indifference curves drawn through each of the points we have discussed. Indifference curve A from Figure 7.10 is inferior to indifference curve B.

Assumptions of indifference curve

She is also on her budget line; she is spending all of the budget, $250, available for the purchase of the two goods. A graph of all the combinations of bundles that a consumer prefers equally. To create an indifference curve, we want to identify bundles that this college student is indifferent about consuming. If a bundle has more burritos, the student will have to have fewer sandwiches and vice versa.

Ms. Bain’s new indifference curve at point D also intersects her budget line; she’s still willing to give up more skiing than the market asks for additional riding. She will make another exchange and move along her budget line to point X, at which she attains the highest indifference curve possible with her budget. Point X is on indifference curve A, which is tangent to the budget line. It has the same amount of skiing as point X, but fewer days are spent horseback riding. What about a choice between the combinations at point W and point T?

Although they come in many shapes and sizes, most of them share a few important properties. Thus, we will look at the four most important properties of indifference curves in more detail below. Suppose Ms. Bain spends 2 days skiing and 3 days horseback riding per semester.

Now point Y is not indifferent to X but is inferior to X because it lies to the left of X. Points like Z and W arc superior and inferior, respectively. In short, there are no points, other than X itself, which are indifferent to X. So far we have established only that the line slopes downward from left to right. 4.21 we pass a line through the north-west zone of ignorance, but also through both the zones which are inferior and superior to X, respectively. The axiom of dominance suggest that all points on the line segment YZ are preferred to X, simply because YZ lies in the superior quadrant with X as origin.

Even if X has more of one commodity and the same amount of the other, X will dominate Y (weak dominance) as Fig. In fact, any point in the shaded area with Y as origin dominates Y. In the same way, any point in the lower (south-west) quadrant such as K is inferior to Y since Y dominates all points in it.

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