6 2 The Indifference Curve Principles of Microeconomics

Bundle latexB/latex also represents more of both goods than bundle latexD/latex, and therefore latexB/latex should be preferred to latexD/latex. However, latexD/latex is on the same indifference curve as latexA/latex, so latexB/latex should be preferred to latexA/latex. Since latexA/latex can’t be preferred to latexB/latex and latexB/latex preferred to latexA/latex at the same time, this is a violation of our assumptions of transitivity and more is better.

• Indifference curves slope downward from left to right because, to maintain the same utility, the consumer must increase the quantity of one good as the other decreases.
• For Quentin’s personal preferences, the substitution effect is stronger so that, overall, he reacts to the lower rate of return with more present consumption and less savings at choice B.
• Therefore, two indifference curves never intersect each other.

Indifference curve analysis is a purely technological model which cannot be used to model consumer behaviour. Every point on any given indifference curve must be satisfied by the same budget (unless the consumer can be indifferent to different budgets). As you go down the curve of an indifference curve, the curve becomes flatter as one good is substituted for the other. An entire utility function can be graphically represented by an indifference curve map, where several indifference curves correspond to different levels of utility.

Indifference Curve Assumptions

Therefore, two indifference curves can never intersect each other. In the above graph, points or combinations A, B, C, D, and E provide the same satisfaction level to Nisha. It can also be seen that as Nisha is consuming one additional quantity of chocolate, she has to sacrifice or give up some quantity of ice cream.

Utility is then a device to represent preferences rather than something from which preferences come. The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles. The slope of the indifference curve at any point is the negative marginal utility of good A as a proportion of the marginal utility of good B. It indicates that the optimal consumption bundle – the marginal rate of substitution between goods A and B – is the ratio of their prices. This document provides an overview of indifference curve analysis for consumer equilibrium. The document contains definitions and explanations of these microeconomics concepts as well as examples and diagrams to illustrate them.

Budget Allocation

This article explores the concept of indifference curves, their theoretical foundations, practical applications, and the unique economic lessons they offer for understanding consumer behavior and market outcomes. The consumer’s budget line represents their income constraint, while the indifference curves represent their preferences. Indifference curves enable us to analyze consumer preferences and make optimal choices. By selecting the point of tangency between the highest indifference curve and the budget line, consumers maximize their utility. Indifference curves illustrate how consumers balance their preferences between two goods, showing trade-offs and satisfaction levels.

According to Edgeworth, “Indifference curve is that path on which a substitution on a particular commodity by another in any manner or quantity gives the consumer the same satisfaction in any position.” But as a matter of principle their effective region is in the form of segments. This is so because Indifference Curves are assumed to be negatively sloping and convex to the origin. Curves I2 and I3, until he reaches the saturation upon S where his total utility is the maximum. If the consumer increases his consumption beyond X and Y his total utility will fall. Since point A is an Indifference Curve IC2, it represents a higher level of satisfaction to the consumer c than point B which is located on the lower Indifference c Curve IC1.

The concept remains one of the most powerful analytical tools in economics, providing insights that connect abstract theory with practical applications in markets and beyond. These issues connect indifference curve analysis to broader questions in welfare economics and social choice theory. These applications make indifference curves essential for policy analysis and welfare economics.

2: Indifference Curves

• By considering the preferences and utility of decision-makers, firms can make informed choices and allocate resources efficiently, even in uncertain circumstances.
• If the goods are complementary indifference curve will be in the shape of a right angle.
• Understanding consumers’ behavior is important if you’re studying for UGC NET Commerce Exam.
• Definition and implications of iso-cost curves detailing combinations of inputs based on cost.View

In other words, two goods are considered as substitute goods for one another when the utility derived from both of them is the same. Click below to consent to the above or make granular choices. You can change your settings at any time, including withdrawing your consent, by using the toggles on the Cookie Policy, or by clicking on the manage consent button at the bottom of the screen.

Non-Convex Preferences and Exceptions

In figure 1.6, when we start with a bundle of one iPod and one set of earbuds (as in bundle latexA/latex), what are the other bundles that are just as good to the consumer? Two sets of earbuds and one iPod is no better than one set of earbuds and one iPod, so bundle latexB/latex lies on the same indifference curve. The same is true for two iPods and one set of earbuds, as in bundle latexC/latex.

Behavioral Economics Critiques

And, what are the properties of indifference curve thus the curve is sloping downward from left to right. There are four basic properties of an indifference curve. According to this theory, a consumer always behaves in a rational manner, i.e. a consumer always aims to maximize his total satisfaction or total utility. What are perfect substitutes and how do their indifference curves look? What is the difference between an indifference curve and a budget line? How does a budget line interact with an indifference curve?

The two arrows labeled with “s” for “substitution effect,” one on each axis, show the direction of this movement. A higher price for a good will cause the budget constraint to shift to the left, so that it is tangent to a lower indifference curve representing a reduced level of utility. Conversely, a lower price for a good will cause the opportunity set to shift to the right, so that it is tangent to a higher indifference curve representing an increased level of utility. Exactly how much a change in price will lead to the quantity demanded of each good will depend on personal preferences. Now, say that income rises to $60 for both Manuel and Natasha, so their budget constraints shift to the right.

The curves are sloped downwards because if you get more of one thing, you need less of the other to be as happy. This is how economists can figure out what people want to buy. For Quentin’s personal preferences, the substitution effect is stronger so that, overall, he reacts to the lower rate of return with more present consumption and less savings at choice B. They might react to a lower rate of return by choosing the same level of present consumption and savings at choice D, or by choosing less present consumption and more savings at a point like F. For these other sets of preferences, the income effect of a lower rate of return on present consumption would be relatively stronger, while the substitution effect would be relatively weaker.

Consumer Surplus and Welfare Analysis

IC is based on an assumption that a consumer is fully aware of his/her preference for various commodities. However, this is an unrealistic assumption as humans have their limitations. 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. It implies that the consumer never reaches at satiety point. When the indifference schedule for X and Y is plotted on a graph, a curve is obtained, which is shown in Figure 1. Let us take two Indifference Curves IC1 and IC2 lying to the right of IC1.

Also, an indifference map consists of different indifference curves with different satisfaction levels in each curve. If two indifference curves intersect with each other, it would mean that one point on each curve gives the same level of satisfaction which contradicts the meaning of an indifference map. Therefore, two indifference curves never intersect each other.

The community indifference map of that country would be placed for that purpose in Quadrant III opposite to that of country A. 4.4, commodity cloth is measured along the horizontal scale XOX’. Commodity steel is measured along the vertical scale YOY’.

The numbers can be in the ascending order of 1, 2, 4, 6 or 1, 2, 3, 4, etc. Numbers have no importance in the indifference curve analysis. Since A is on a higher indifference curve and to the right of N, the consumer will be having more of both the goods X and Y. Even if the two points on these curves are on the same plane as M and A, the consumer will prefer the latter combination, because he will be having more of goods X though the quantity of goods Y is the same. The above table represents various combination of coffee and cigarette that gives a man same level of utility. When the man drinks 12 cup of coffee, he consumes 1 cigarette every day.