Top 6 Properties of Indifference Curve With Diagram
The slope of an indifference curve exhibits the speed at which two goods could be exchanged with out affecting the buyer’s utility. Figure 7.9 “The Marginal Rate of Substitution” reveals indifference curve C from Figure 7.eight “Indifference Curves”. If a consumer purchases two goods, the budget limitation can be displayed with the help of a budget line on a graph.
In this diagram, an increase of oranges from OM to OM1 is accompanied by a progressively diminishing number of bananas from ON to ON1. Thus a falling curve whose slope diminishes as we move to the right is bound to be convex to the origin to axes. The major criticism of this theory is that it is based on unrealistic assumptions which question its economic viability.
- Consumer can rank his/her preferences on the basis of satisfaction yielded from each combination of goods.
- This is clearly not true in reality since different people have different preferences.
- The slope of the budget line is the relative price of good A in terms of good B, equal to the price of good A as a ratio of the market price of good B.
- Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C.
- It shows the consumer’s preference for one good over another only if it is equally satisfying.
- Therefore, the principle of diminishing marginal utility indicates that each additional unit of consumption adds less to the cumulative utility than the previous unit.
These two indifference curves characterize two different levels of satisfaction. If IC1 and IC2 cross or meet each other, that cross will denote a similar level of satisfaction, and that is impossible in IC analysis. Indifference curves (IC’s) are at all times convex to the origin due to the fact of diminishing https://1investing.in/ marginal rate of substitution. The marginal rate of substitution of one commodity for another reduces or diminishes when more and more of the one commodity is substituted for another. It means, the more we consume one commodity, the less we sacrifice another commodity so that IC is convex to the origin.
He is supposed to rank them in his order of preference and can state if he prefers one combination to the other or is indifferent between them. An English Economist, Francis Ysidro Edgeworth, invented the technique of indifference curve nearly at the end of the 19th century. In the 1880’s he employed it to show the possibility of exchange between two persons but he did not employ different types of curves to explain consumer’s four properties of indifference curve demand. The Italian economist Vilfredo Pareto had polished and applied the concept more expansively than before in the early nineties. Finally, in the 1930’s it was greatly extended by two English economist R.G.D Allen and J.R Hicks. This gives the conclusion that as the consumer travels down the indifference curve, the marginal significance of x has become greater as the respective angles of tangents are greater.
At each of the consumption bundles, the individual is said to be indifferent. An Indifference Curve is the one that slopes downwards only showing the indifference of a consumer in terms of consumer satisfaction that they get with different goods. When it comes to the Indifference Curve analysis, the emphasis is majorly on the marginal rates of substitution or MRS as well as the opportunity costs.
As a result, the indifference curve slopes downward from left to right. As one moves along a straight-line indifference curve of perfect substitutes, marginal rate of substitution of one good for another remains constant. Examples of goods that are perfect substitutes are not difficult to find in the real world.
Price Ceiling and Price Floor
This property implies that an indifference curve has a negative slope. This is because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little. These differences in a consumer’s marginal substitution rates cause his or her indifference curve to bow inward.
At a value of $50, she maximized utility at point X, spending three days horseback driving per semester. When the worth falls to $25, she maximizes utility at point Z, riding 4 days per semester. The consumer is expected to buy any of the two commodities in a combination. The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice. The following diagram will help you understand this property clearer.
In this case, ΔY2 is greater than ΔY1, ΔY3 is greater than ΔY2, and so on. Hence, you get increasing marginal rate of substitution of X for Y. The concept is used to model consumer behavior in order to analyze how consumers make choices between different options. The curves are typically downward-sloping from left to right, meaning that as more of one good is consumed, the amount of the other good that the consumer desires decreases. It is assumed in the analysis that a consumer always prefers a large number of a good to smaller amount of that good provided that the amount of other goods at his disposal remains unchanged.
The assembly of various indifference curves in a graph is known as the indifference curve map. Thus, an indifference map is a series of indifference curves for a particular consumer’s consumption of any two commodities. The buyer’s preferences can be completely described by an infinite number of IC’s in the two-dimensional space, each IC representing a distinct level of satisfaction. In the microeconomic analysis, an indifference curve is a graph that shows different combinations of two goods or services that provides the same level of total satisfaction to the consumers.
Indifference Map refers to the family of indifference curves that represent consumer preferences over all the bundles of the two goods. An indifference curve represents all the combinations, which provide same level of satisfaction. However, every higher or lower level of satisfaction can be shown on different indifference curves. This property is due to diminishing marginal utility, which states that as we consume more and more units of a good or service, each successive unit will provide us with less and less satisfaction.
Indifference Curves are convex to the origin
Similarly point C is better than point B and D is better than point C as the combinations differ giving the consumer greater satisfaction. Convexity of the curve implies the dimension marginal rate of substitution. A budget line represents all those combinations of the two commodities that the consumer can purchase, given his money income and the prices of the two commodities.
Consumer can rank his preferences on the basis of the satisfaction from each bundle of goods. A higher curve measure greater quantities of both the commodities and Hence the highest level of satisfaction. As a result of an increase in the consumer’s income, The budget lines will shift right words.
An indifference curve far away from the origin is higher or the upper indifference curve and close to the origin is a lower indifference curve. A rational consumer is constantly indifferent in selecting the blends of accessible as every blend holds an equal level of satisfaction. That’s why the indifference curve is also known as the Iso-Utility curve or equal utility curve. If an indifference curve touches the Y axis at a point P as shown in the figure, it means that the consumer is satisfied with OP units of y commodity and zero units of x commodity. This is contrary to our assumption that the consumer wants both commodities although in a smaller or larger quantities. Therefore the indifference curve will not touch either the X axis or Y axis.
Hence, a consumer prefers to reach the tallest line to attain a higher utility level. But there are some budget constraints due to the low income of the consumer. The level of satisfaction of consumer for any given combination of two commodities is same for a consumer throughout the curve.
Characteristics of Indifference Curves (with diagram)
A budget line reveals all the possibilities in combinations of two goods a consumer can purchase with limited income. It allows the consumer to buy within a given budget, i.e., within their current income. Yet, two indifference curves need not be parallel to each other. In the above image, IC1 and IC2 are two indifference curves and C is the point where both the curves intersect. Describe and explain the four properties of these indifferenc…
An Indifference Curve is basically a graph that links a combination of all products which yield an equal level of customer satisfaction. The most fundamental thing about it is that it shows how all the goods or any combination of them gives the customer the same amount of satisfaction. In other words, it also means how a consumer prefers the goods equally.
This approach does not use cardinal values like 1, 2, 3, 4, etc. Rather, it makes use of ordinal numbers like 1st, 2nd, 3rd, 4th, etc. which can be used only for ranking. It means, if the consumer likes apple more than banana, then he will give 1st rank to apple and 2nd rank to banana.
Similarly, if an indifference curve I2 touches the Y-axis at L, the consumer will have only OL of Y good and no amount of X. Such curves are in contradiction to the assumption that the consumer buys two goods in combinations. From the assumptions described above the following properties of indifference curves can be deduced. The consumer arranges the two goods in a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods.
If a consumer has a lot of good B, the MRS is 3 units of good B per unit of good A. If she has more of good A, the MRS is 0.5 units of good B per unit of good A. In other words, if they have a lot of good B, they are more willing to trade some of it in to get an additional unit of good A and vice versa.
Theory of Exchange
The following conclusions must be fulfilled for a consumer to be in equilibrium. Since grapes have gone cheaper, the consumer would like to purchase more of grapes in place of apples. As a result, the new budget lines will shift towards right on the x-axis. In the case of those complementary goods which are jointly demanded like bread and butter, shoes and socks. Thus,Indifference curve analysis seeks to remedy this shortcoming of utility analysis. She is thus willing to surrender 2 days of snowboarding for a second day of horseback using.
What is Short Run Cost? Types: Total, Average, Marginal
Since each indifference curve represents a different level of satisfaction, indifference curves can never intersect at any point. The same reasoning applies if two indifference curves touch each other at point С in Panel of the figure. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say X and Y. An indifferent curve is drawn from the indifference schedule of the consumer. The above figure shows the downward sloping indifference curve. When consumer moves from point A to B, the quantity of Y commodity decreases from Y1to Y1, and at the same time, the number of X increases from X1 to X2 keeping the same level of satisfaction.