Properties of Indifference Curves

PP1 is the production possibility curve or opportunity cost curve. (vii) The community indifference curves can be derived from the individual indifference curves and these are negatively sloped convex curves to the origin. The device of trade indifference curve was originally forged by the writers like Leontief and Lerner. Meade in 1952 in his work, A Geometry of International Trade. This device shows, given a particular level of income, what terms of trade would leave a country neither better off nor worse off in respect of its international exchange with another country.

Indifference Curve Analysis: Concept, Assumption and Properties

Different types of costs in economic analysis including total, variable, and marginal costs.View Definition and implications of iso-cost curves detailing combinations of inputs based on cost.View Definition and characteristics of isoquants, showing input combinations for constant output levels.View Explains how to derive the demand curve from price consumption curve and changes in consumer equilibrium.View Definition and explanation of the budget line representing alternative product combinations within a budget.View

Consistency and Transitivity of Choice

An indifference curve is used by economists to explain the tradeoffs that people consider when they encounter two goods they want to buy. People can be constrained by limited budgets so they can’t purchase everything so a cost-benefit analysis must be considered instead. Indifference curves visually depict this tradeoff by showing which quantities of two goods provide the same utility to a consumer. Indifference curves are heuristic devices that are used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget. Economists have adopted the principles of indifference curves in the study of welfare economics. This can be explained by considering a hypothetical situation where two indifference curves intersect.

Applications in Consumer Theory

• Utility is then a device to represent preferences rather than something from which preferences come.
• From this example, we can see that indifference curves for perfect complements have right angles.
• An indifference curve is a chart that tracks various combinations of two goods or commodities that consumers can choose.
• Hence, a consumer prefers to reach the tallest line to attain a higher utility level.
• If you are finding it a little tricky to sketch diagrams that show substitution and income effects so that the points of tangency all come out correctly, it may be useful to follow this procedure.

Similarly, rate of decrease in consumption of coffee has gradually decreased even with constant increase in consumption of cigarette. An indifference curve can neither be horizontal line nor an upward sloping curve. It is assumed that the consumer has fixed amount of money, all of which is to be spent only on two goods.

Assumptions of Trade Indifference Curve:

The indifference curve analysis is indicated with a graphical representation. Where the X-axis indicates one commodity (Cloth) and Y-axis refers to another good (Book). Combinations of two goods on the curve provide Jack with the same level of satisfaction (represented by points A, B, C, D in the image). If the amount substituted is imperfect, the marginal rate of substitution will be constant.

This is because of monotonic preferences because higher indifference curve means that the consumer is getting more of both the commodities, or atleast more units of one good and no less of other This violates the basic assumption of indifference curves. This again presupposes that rational consumers will prefer a variety of commodities combinations. One of the basic assumptions of indifference curves is that the consumer purchases combinations of different commodities.

Indifference Curve : Meaning, Assumptions & Properties

This is an important assumption for making consistent choices among a large number of combinations. Consumers would prefer to move in the direction indicated by the arrow in the figure. Such a diagram is known as an indifference map where each indifference curve corresponds to a different indifference schedule of the consumer. It is like a contour map showing the height of the land above sea-level where instead of height, each indifference curve represents a level of satisfaction. If the various combinations are plotted on a diagram and are joined by a line this becomes an indifference curve, as f in the Figure 1. The indifference curve I1 is the locus of the points L, M, N, P, Q, and R, showing the combinations of the two goods X and Y between which the consumer is indifferent.

Indifference curve analysis helps economists understand how changes in prices affect consumer choices. If the price of a product goes up, consumers might choose a more affordable product instead. By looking at the indifference curves for these two products. Economists can predict how much of the cheaper product consumers will want.

• They’ll end up on an indifference curve that’s farther from the origin as a result and be better off.
• It allows the consumer to buy within a given budget, i.e., within their current income.
• Give a real-life example to explain the indifference curve concept.
• Now consider bundle latexA/latex on one of the indifference curves.
• The law of diminishing marginal utility says that a person consumes more of a good.

To maximize his utility, José will choose to consume on the highest possible indifference curve that he can afford. Since very point on an indifference curve represents equal utility, we can be confident that every point on IC2 is superior to every point on IC1, and every point on IC1 is superior to every point on IC0. It is important to recognize that there is an infinite amount of indifference curves. Point D – At point D, José has 1 more T-shirt, but 3 fewer movies. Since José only views T-shirts as two times more valuable than movies, his utility has decreased, and he is on a lower indifference curve.

Movement and Shift In Demand Curve

Point A on the I2 curve indicates a higher level of satisfaction than point В on the 12 curve, as it lies farther away from the origin. But point С which lies on both the curves yields the same level of satisfaction as point A and B. In between two indifference curves there can be a number of other indifference carves, one for every point in the space on the diagram. Combination at point Q contains more of both the goods (X and Y) than that what are the properties of indifference curve 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.

Thinking about José’s preferences, it may seem odd to simply state that he values T-shirts twice as much as movies. In this case, perhaps he would be willing to give up more movies to obtain a T-shirt. This intuition that consumers prefer variety leads us to an indifference curve that is strictly convex.

The two curves 1; and I2 shown in Figure 8 are not parallel to each other. The convexity rule implies that as the consumer substitutes X for Y, the marginal rate of substitution diminishes. It means that as the amount X is increased by equal amounts that of Y diminish by smaller amounts. Consequently, an indifference curve will be of negative slope, as shown in Figure 4 (D) where A and В combinations give equal satisfaction to the consumer. As he moves from combination A to В he gives up less quantity of Y in order to have more of X. The slope of an indifference curve is negative, downward sloping, and from left to right.