importance of indifference curve with diagramimportance of indifference curve with diagram

In Fig. 4 Important Properties of Indifference Curve (with curve diagram) - - StuDocu. He can tell whether he prefers the first to the second, or the second to the first or he is indifferent between them. The degree of convexity of an indifference curve depends on the rate of fall in the marginal rate of substitution of X for Y. The indifference curve I 1 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. Property II: Indifference curves are convex to the origin: Another important property of indifference curves is that they are usually convex to the origin.

It fails to use money as the measuring rod of an individuals satisfaction derived from the consumption of various goods. 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 utility analysis assumes constant marginal utility of money. In order to derive the consumers budget constraint we have to combine equations (6.131) and (6.132) and thereby we obtain. After the consumer receives the price subsidy on X, his expenditures in terms of x would be OB1 and those in terms of y would be OA, prices of the goods remaining the same. Since an indifference curve represents those combinations of two commodities which give equal satisfaction to the consumer the combinations represented by points A and C will give equal satisfaction to the consumer because both lie on the same indifference curve IC2. So far in the text, we have described the level of utility that a person receives in numerical terms. Figure 2. 6.103 that the total effect of the rise in r is equal to the SE plus the IE. At point A, Lilly has few books and many doughnuts. Only convex curves will lend to the principles of Diminishing Marginal Rate of substitution. In Figure 3, consider the indifference curves f and I 2 and combinations N and A respectively on them. Figure 1. We shall do this with the help of Fig. Meaning of Indifference Curve 2. As we know, the movement in the consumers equilibrium point from D to F along IC1 is due to the SE.

It is scientific and is, at the same time, free from the psychological quantitative measurement of the utility analysis. Thus, the consumer will definitely prefer A to B, that is, A will give more satisfaction to the consumer than B. Report a Violation 11. 8.8 the left- hand portion of an indifference curve of the perfect complementary goods is a vertical straight line which indicates that an infinite amount of Y is necessary to substitute one unit of X and the right-hand portion of the indifference curve is a horizontal straight line which means that an infinite amount of X is necessary to substitute one unit of Y. Figure 1, for example, applies only to Lillys preferences. An indifference curve is a graphical representation that explores how a consumer may be indifferent to two products that give him the same level of customer satisfaction and utility. The following points highlight the top nine properties of Indifference Curve.

In other words, the indifference curve is relatively flatter in its right-hand portion and relatively steeper in its left-hand portion. Property I. Indifference curves slope downward to the right: This property implies that an indifference curve has a negative slope. Explore the definition, learn. As one moves along a straight-line indifference curve of perfect substitutes, marginal rate of substitution of one good for another remains constant. Higher indifference curves represent a greater level of utility than lower ones. He can use the cash in buying the goods according to his will. 6.95. 6.96(d), the position of the ICs makes the post-subsidy situations qualitatively different from the previous two cases. In case of perfect substitutes, the indifference curves are parallel straight lines because the consumer equally prefers the two goods and is willing to exchange one good for the other at a constant rate. Report a Violation 11.

Disclaimer 8. Content Filtration 6. Most people would prefer to increase the quantity or quality of the goods and services they consume. After we have known the SE, we may now withdraw the notional compensatory increase in his money income, and as we do this his budget line would have a parallel leftward shift from ST to L2M2 and his equilibrium point would move from the point F on IC2 to the point E on IC1. It may be noted that the consumer here does not save in the second period because there is no third period. Watch this video to apply what youve learned about using indifference curves to find consumer equilibrium.

The indifference curve technique is definitely superior to the utility analysis because it discusses the income effect when the consumers income changes; the price effect when the price of a particular good changes and its dual effect in the form of the income and substitution effects. 6.96(a). 6.96, the pre- subsidy equilibrium of the consumer has occurred at the point E where the consumers budget line AB has touched one of his ICs, viz., IC1. Plagiarism Prevention 5. Let us now suppose that a tax is imposed on cash subsidy, but not on the in-kind subsidy. Such a diagram is known as an indifference map where each indifference curve corresponds to a different indifference schedule of the consumer. In this article we will discuss about Indifference Curves. Another example is the Food Stamp Programme in the USA before 1979. We may verify in Fig. An indifference curve is a curve that represents all the combinations of goods that give the same satisfaction to the consumer. When the consumer receives a cash subsidy this would boost up his income, the prices of the goods remaining unchanged. 1. Let us now suppose that the consumer is given an income subsidy of amount, say, S. This implies that now his income would increase, from M to M + S. As the consumer now spends more money, prices of the goods remaining unchanged, his budget line would have a parallel horizontal shift to the right from AB to A1B1, and his income would increase by BB1 in terms of x, or, S in terms of money, and his equilibrium point would move from Point D is the point of tangency between the budget line A1B1 and the curve IC3. This website uses cookies and third party services. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say X and Y. Lastly, in Fig. At this point, the slope of the indifference curve equals the budget line, so that. In Fig. 6.99 gives us how much period 2 consumption (i.e., C2) he may forego for a small one unit increase in period 1 consumption (i.e., C1). By setting aside the assumption of putting a numerical valuation on utilityan assumption that many students and economists find uncomfortably unrealisticthe indifference curve framework helps to clarify the logic of the underlying model. Indeed, the slope along an indifference curve as the marginal rate of substitution, which is the rate at which a person is willing to trade one good for another so that utility will remain the same. Image Guidelines 4. An indifference curve is a line showing all the combinations of two goods which give a consumer equal utility. The degree of convexity of an indifference curve depends upon the rate of fall in the marginal rate of substitution of X for Y. A normal indifference curve will be convex to the origin and it cannot be concave. (8) An indifference curve is always convex to the origin. Therefore, now, the consumers budget line would become AC B1 in Fig.

The indifference curve technique is a two-commodity model which discusses consumer behaviour in the case of substitutes, complementaries and unrelated goods. Content Filtration 6. 6.102, from C1 to C and his C2 would increase from C2 to C2. The following points highlight the top nine advantages of indifference curve technique over marshallian utility analysis.

Privacy Policy 9. What is Lillys utility-maximizing choice? Terms of Service 7. It is, thus, superior to the utility analysis. Indifference Curve Applications of Taxes and Subsidies! The orange curves apply to Abby, and are convex as seen from the top right. Account Disable 12. Let us note that his consumption of X is higher under the income tax than under the excise tax (GE > FD), since, under the excise tax, he is at the point D, but under the income tax, he has further opportunity to maximise in the region of the triangle DB1B2. It also studies the cross effect when with change in the consumers income, the price of the other good also changes. The entire utility analysis assumes that utility is a cardinally measurable quantity which can be assigned weights called untils. (5) The consumers tastes, habits and income remain the same throughout the analysis. Thus, while indifference curves have the same general shapethey slope down, and the slope is steeper on the left and flatter on the rightthe specific shape of indifference curves can be different for every person. The same argument holds good in this case as developed above in the case of intersection of indifference curves. 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. Since an infinite number of indifference curves exist, even if only a few of them are drawn on any given diagram, there will always exist one indifference curve that touches the budget line at a single point of tangency. An indifference curve shows all combinations of goods that provide an equal level of utility or satisfaction. This new budget line would touch a higher IC. 6.97(b) illustrates the case where the ICs of the consumer are so positioned that he will prefer the cash subsidy even if taxed to the untaxed in-kind subsidy. Given the combination of Lillys personal preferences, as identified by her indifference curves, and Lillys opportunity set, which is determined by prices and income, B will be her utility-maximizing choice. If indifference curves were concave or straight lines, the consumer would succumb to monomania, that is, he would buy and consume only one good. The in-kind subsidy budget line, however, would remain the same as ACB1.

Therefore, the amount he pays in tax is equal to (FH.px + OF.py) (FD.px + OF.pY) = (FH FD)px = DH.px. The numerical slope of the budget line is: The budget constraint of the consumer states that the present value of consumption in the two period should be equal to that of the income of the two periods. As stated above, when two goods are perfect substitutes of each other, the indifference curve is a straight line on which marginal rate of substitution remains constant. (6.134) gives us the standard form of the consumers inter-temporal budget constraint. Any points on the highest indifference curve Uh, like F, provide greater utility than any points like A, B, C, and D on the middle indifference curve Um.