Indifference curves and the ordinalist revolution archive ouverte. Indifference curve meaning, assumptions,and features youtube. Ppt indifference curve analysis powerpoint presentation. 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. The ordinal utility theory or the indifference curve analysis is based on four main assumptions. Browse more topics under theory of consumer behavior. The indifference curve um has four points labeled on it. The indifference curve analysis measures utility ordinally. Indifference curve definition, properties, assumptions. Edgeworth, it is widely used as an analytical tool in the study of consumer behaviour, particularly as related to consumer demand.
Rational consumers according to this theory, a consumer always behaves in a rational manner, i. 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. 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. It implies that the consumer is capable of simply comparing different levels of satisfaction. All points on ic2 are preferred to all points on ic1. The properties of these indifference curves reflect the four consumer preference assumptions. If a curve does not have a negative slope as shown in figure 3, it cannot be an indifference curve. Conditions to explain equilibrium of the consumer consumer equilibrium under indifference curve analysis to explain the consumers equilibrium the following conditions are there 1. It is assumed that the consumer has not reached the point of saturation.
Home microeconomics preference theory consumers preferences and its assumptions. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say x and y. An indifference curve represents a series of combinations between two different economic goods, between which an individual. Consumers surplus can be measured with the help of this technique without any need for making.
Examples of indifference curves kent state university. An indifference curve shows all of the amounts of goods that give the consumer the same level of satisfaction. The indifference curve is so named because the consumer would be indifferent between choosing any one of these commodity bundles. An indifference curve is a locus of all combinations of two goods which yield the same level of satisfaction utility to the consumers. Developed by the irishborn british economist francis y. 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. Alexei cares about his exam grade and his free time. 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. 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.
Indifference curves are widely used in microeconomics to analyze consumer preferences. Baumol has taken three main assumptions of nonsatiety, transitivity and diminishing marginal rate of substitution. Consumers equilibrium through indifference curve analysis. In order to remain on the same level of satisfaction same indifference curve, the consumer must sacrifice one commodity for another. Indifference curve, in economics, graph showing various combinations of two things usually consumer goods that yield equal satisfaction or utility to an individual. The implication of the transitivity assumption is that indifference curves cant. In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. There is an indifference curve through every point but we only show some of them. It is also known as or equal product curve or producers indifference curve. An indifferent curve is drawn from the indifference schedule of the consumer. 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. Four properties of indifference curves quickonomics.
Ic1 represents the indifference set d,c,b,a while ic2 represents the basket or indifference set g,f,e. 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. 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. By setting aside the assumption of putting a numerical valuation on utilityan assumption that many students and economists find uncomfortably unrealistic the. 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. 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. 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. It doesnt have dependent and independent variables in the sense of there being a cause and effect. 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. Microeconomics indifference curves flashcards quizlet. It is a firms counterpart of the consumers indifference curve. The indifference curve shows the different combinations of two goods that give equal satisfaction and utility to the consumers. However, since we use indifference curves to show a consumers choice problem, from the point of view of solving optimisation problems continuity is a.
An indifference curve is an implicit function that has the amounts of goods as variables. Similarly at bundle y, she is consuming y1 units of good 1 and y2 units of good 2. Consumers preferences and its assumptions microeconomics. Introduction to indifference curves and budget lines. The group of indifference curves is called an indifference map. At bundle x, the consumer is consuming x1 units of good 1 and x2 units of good 2. 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.
An indifference curve is a collection of all commodity bundles which provide the consumer with the same level of utility. 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. The utility function defines the level of utility or satisfaction as a function of the quantities of commodities consumed. 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. Theory of ordinal utilityindifference curve analysis. For this reason, an indifference curve always has a negative slope. 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 are the properties of the indifference curves. 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. Indifference curve analysis is basically an attempt to improve cardinal utility analysis principle of marginal utility. It is assumed that individuals are rational in making decisions from their expenditures on consumer goods. Indifference curve analysis 1 indifference curve analysis 1. The consumer has indifference map of good x and good y 2. Indifference curve adopted the concept of ordinal utility instead of cardinal utility.
The various assumptions of the analysis are explained below. This is based on consumer preference and believes that we cannot quantitatively measure human satisfaction in monetary terms. To show the relationship between utility functions, indifference curves, and total utility curves. 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. An indifference curve is an implicit function that has the amounts of goods. As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin.
In figure 1 the curved line which passes through commodity bundle a represents an indifference. The consumer ranks his preference according to the satisfaction of each combination. Thus the basis of indifference curve approach is the preference indifference hypothesis. This assumption implies that the consumer has not reached the point of. 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. This approach assigns an order to consumer preferences rather than measure them in terms of money. 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. The axes of those graphs represent one commodity each e. 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.
The consumer has a fixed money income which is spent on x and y 3. The food stamps problem 2 indifference curve a collection of points for which the consumer is indifference between. Preferences and utility 5 x 1 y 2 good 2 y good 1 x 2 fig. Consumers tastes can be related to utility concepts or indifference curves.
Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. 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. Read this article to learn about indifference curves. As the consumer increases x by one unit, heshe must sacrifice y to remain at fixed u. Thus, the tradeoff between the goods that the individual is willing to undertake mrs. A popular alternative to the marginal utility analysis of demand is the indifference curve analysis. At the optimum, the indifference curve is tangent to the budget constraint so their slopes are equal. What is the importance of the indifference curve analysis. An indifference curve can be drawn through any point. This property shows that any increase in the amount of one commodity is accompanied by a reduction in amount of other. 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.
Without further assumptions indifference curves can have a strange shape. Definition an indifference curve is a curve which shows all the combinations of two products. Indifference curves are graphs that represent various combinations of two commodities which an individual considers equally valuable. 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. The properties of indifference curve follow from its definition and the assumptions upon which indifference curve approach is based. 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.
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