Thus, the consumer will definitely prefer A to B, that is, A will give more satisfaction to the consumer than B. But the two indifference curves cutting each other lead us to an absurd conclusion of A being equal to Bin terms of satisfaction. We therefore conclude that indifference curves cannot cut each other. At point C, the consumer purchases only OC of beans and no rice.
This approach assigns an order to consumer preferences rather than measure them in terms of money. When these combinations are plotted on the graph, the resulting curve is called indifference curve. This curve is also called the iso-utility curve or equal utility curve.
When he started consuming two cigarettes a day, his coffee consumption dropped to 8 cups a day. In the same way, we can see other combinations as 3 cigarettes + 5 cup coffee, 4 cigarettes + 3 cup coffee and 5 cigarettes + 2 cup coffee. And, indifference curve theory assumes that the consumer has not reached the point of satiety. It implies that the consumer still has the willingness to consume more of both the goods.
( A Higher Indifference Curve Represents a Higher Level of Satisfaction:
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 that the consumer’s behavior is consistent over the period. It means if a consumer, 1ooses combination A over combination B, at a given time, he will not choose combination B over combination A at some other time provided both the combinations are available to him.
He is equally satisfied with OF units of rice and OK units of beans shown by point b on the indifference curve. Two demand curves can intersect each other, while two indifference curves cannot intersect each other. How does the achievement of The Utility Maximizing Solution in Figure 7.13 correspond to the marginal decision rule? That rule says that additional units of an activity should be pursued, if the marginal benefit of the activity exceeds the marginal cost. The observation of that rule would lead a consumer to the highest indifference curve possible for a given budget.
In simple words, the combination of commodities on the higher IC is preferred by a consumer to the combination that lies on a lower IC. Therefore, the consumer is indifferent to any combination of two commodities if he/she has to make a choice between them. This is because an individual consumes a variety of goods over time and realises that one good can be substituted with another without compromising on the satisfaction level. The greater the fall in marginal rate of substitution, the greater the convexity of the indifference curve. The less the ease with which two goods can be substituted for each other, the greater will be the fall in the marginal rate of substitution. The ordinal utility theory or the indifference curve analysis is based on the assumptions as discussed above.
- At point (a) on the indifference curve, the consumer is satisfied with OE units of rice and OD units of beans.
- Combinations above and to the right of the budget line are beyond the reach of her budget.
- 8.5 two indifference curves are shown cutting each other at point C.
- When the indifference schedule for X and Y is plotted on a graph, a curve is obtained, which is shown in Figure 1.
Fischel (1995) however, raises the counterpoint that using WTA as a measure of value would deter the development of a nation’s infrastructure and economic growth. If, however, while constructing the segment XY we find that IV lies on the indifference curve, the curve is simply convex, not strictly so. In other words, the term ‘convex’ covers both the strict convex case and the case where W lies on the indifference curve. To restrict ourselves to a curve like IC1 we have to draw a distinction between ‘general’ convexity and ‘strict’ convexity. 4.25 for a movement along IC from left to right a certain amount of x1 is required to compensate the consumer for the loss of x2. To the right of X, all bundles contain more x1; hence all points to the right of x1, regardless of which quadrant they are in, are preferred to X.
Return to the situation of Lilly’s choice between paperback books and doughnuts. Say that books cost $6, doughnuts are 50 cents each, and that Lilly has $60 to spend. This information provides the basis for the budget line shown in Figure 1. Along with the budget line are shown the three indifference curves from Figure 1.
Both of these combinations are equally preferred by him and he is indifferent to these two combinations. Panel (a) shows the indifference curves and budget line for typical British prisoners and Panel (b) shows the indifference curves and budget line for typical French prisoners. Suppose the price of an ounce of tea is 2 cigarettes and the price of an ounce of coffee is 1 cigarette. The slopes of the budget lines in each panel are identical; all prisoners faced the same prices.
Understanding Indifference Curves
Combination at point Q contains more of both the goods (X and Y) than that of the combination at point S. We know that total utility of commodity tends to increase with increase in stock of the commodity. Thus, utility at point Q is greater than utility at point S, i.e. satisfaction yielded from higher curve is greater than satisfaction yielded from lower curve.
Top 6 Properties of Indifference Curve (With Diagram)
Choice theory formally represents consumers by a preference relation, and use this representation to derive indifference curves showing combinations of equal preference to the consumer. An indifference curve consists of various combinations of two merchandise. If an indifference curve traces the horizontal or vertical axis, it implies that the customer prefers only one commodity because when it touches axes, one of the commodities becomes zero in quantity. This interrupts the basic explanation of an indifference curve. Hence, an indifference curve does not touch either a horizontal axis or a vertical axis.
Indifference Curves in Economics: What Do They Explain?
Thus, an indifference curve is also known as ‘equal satisfaction curve’ or ‘iso-utility curve’. The reason for the negative slope is that as a consumer increases the consumption of commodity X, he/ she sacrifices some units of commodity https://1investing.in/ Y in order to maintain the same level of satisfaction. On the indifference curve (IC), there can be several other points in between the points a, b, c, d, and e, which would yield the same level of satisfaction to the consumer.
An indifference curve is a graph of all the combinations of bundles that a consumer prefers equally. In other words, the consumer would be just as happy consuming any of them. Representing preferences graphically is a great way to understand both preferences and how the consumer choice model works—so it is worth mastering them early in your study of microeconomics. The choice of F with five books and 100 doughnuts is highly desirable, since it is on the highest indifference curve Uh of those shown in the diagram. However, it is not affordable given Lilly’s budget constraint. However, choice G of six books and 48 doughnuts is on lower indifference curve Ul than choice B of three books and 84 doughnuts, which is on the indifference curve Um.
Fig 4.22 shows three possible shapes for an indifference curve. Of these only curve IC] is meaningful because it is convex to the origin. In order to ensure this shape of an indifference curve we have to make a further axiom. If we repeat this exercise with M as the reference point, there is likely to exist a point like N which is indifferent to M. Then with N as reference point, we can establish P which is indifferent to N and so on. The continuous line (the ‘locus’ joining P and M) and X with similar points in the south-east quadrant is obviously an indifference curve.
This means that as the amount of rice (X) is increased by equal amounts, that of beans (Y) diminishes to smaller amounts. Intermediate Microeconomics Copyright © 2019 by Patrick M. Emerson is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. A is preferred to B
B is preferred to A, or
A is equally good as B.
The axiom of weak convexity suggests that the better set is convex but not strictly so. This means that we allow the possibility of line segments in the indifference curves as Fig. The better sets for points X, Y and Z, respectively are convex but none is strictly convex.
It means, the more we consume one commodity, the less we sacrifice another commodity so that IC is convex to the origin. The indifference curve analysis work on a simple graph having two-dimensional. Each individual axis indicates a single type of economic goods. If the graph is on the curve or line, then it means that the consumer has no preference for any goods, because all the good has the same level of satisfaction or utility to the consumer. For instance, a child might be indifferent while having a toy, two comic book, four toy trucks and a single comic book. This means that any indifference curve has no gaps or breaks at any point.