Thus, the income and welfare implications can be explained with the help of indifference curves which are not possible in case of Marshallian analysis of consumer behaviour. Indifference Curves Cannot Intersect It is impossible for two indifference curves to cross. Consistency Another important assumption is consistency. In order to derive a plausible conclusion, the consumer under consideration must be a rational human being. If we move from O to X we see that the price of X decreases and reverse is the case when we move towards O.
On account of indifferent or neutrality of an individual consumer these curves are also called indifference curves. If we depict this in the form of a curve, we get an indifference curve. In a Nutshell Indifference curves are graphical representations of various combinations of two commodities which an individual considers equally valuable. A set of indifference curves is known as an indifference map. Many core principles of appear in indifference curve analysis, including individual choice, marginal utility theory, income and substitution effects, and the subjective theory of value. He has order of preferences, namely, X, Y and Z goods. In the last case we say that he is indifferent between them.
If he spends entire money on buying apple, it means that apple gives him more satisfaction than orange. On the graph, the locus of all combinations of commodities X and Y in our example forms an indifference curve figure 1. Example of choice of goods which give consumers the same utility Table plotted as indifference curve Diminishing marginal utility The indifference curve is convex because of. Different economists have defined indifference curves in different ways. Thus, all other combinations on both curves would have to provide the same level of satisfaction as well. Diagram 11 C shows the change in the money income of the consumer.
Just think about it, if someone were to ask you if you wanted a free slice of pizza or an entire pizza for free, what would you say? It means, infinite number of indifference curves can be drawn. A negative slope and transitivity exclude indifference curves crossing, since straight lines from the origin on both sides of where they crossed would give opposite and intransitive preference rankings. It tells the exchange ratio between two commodities when a consumer selects different combinations. Table: Indifference schedule Combination Mangoes Oranges A 1 14 B 2 9 C 3 6 D 4 4 E 5 2. The marginal rate of substitution is either zero or infinite.
You can now buy less of good Bananas. Thus, budget line or price line shows the various combinations of two commodities that can be purchased by the consumer with his given income. A negative slope and transitivity exclude indifference curves crossing, since straight lines from the origin on both sides of where they crossed would give opposite and intransitive preference rankings. Different combinations of commodities showing the same level of satisfaction and different levels of satisfaction are available. It also separates the income effect and substitution effect from the price effect.
The analysis has been widely accepted and used in all the parts of economics. Preference relations Let be a set of mutually exclusive alternatives among which a consumer can choose. Therefore, the rate of decrease in a commodity cannot be equal to the rate of increase in another commodity. The following are the assumptions of indifference curve analysis: Rationality The theory of indifference curve studies consumer behavior. To be equivalent to h it must have less apple A. It is also assumed that prices of both the commodities are constant.
This is reflected in the indifference curves. We cannot segregate income effect and substitution effect from price effect. Hence, when the quantity of one commodity A in a combination of two goods increase, the quantity of the other commodity O must decline. The elbows of the curves are. The assumptions of the ordinal theory are the following: 1 The consumer acts rationally so as to maximise satisfaction.
This rate is called the rate of substitution of O for A. In other words, an indifference curve is the of various points showing different combinations of two goods providing equal utility to the consumer. A collection of selected indifference curves, illustrated graphically, is referred to as an indifference map. However, every higher or lower level of satisfaction can be shown on different indifference curves. This means that for each bundle there is a unique relation, , representing the satisfaction relation associated with. Indifference curve analysis explains the demand analysis without assuming the marginal utility of money as constant and it is based on multi-commodity model which is more practical and realistic.
An indifferent curve is drawn from the indifference schedule of the consumer. The main use of indifference curves is in the of potentially observable patterns for individual consumers over commodity bundles. The collection of data relating to scale of preferences of an individual consumer behaviour are not easily available and their collection is also very difficult. One kind of economic good is placed on each axis. Properties of Indifference Curve Each point in the diagram stands for a basket of meat and ghee cooking oil A, B, C, D are all baskets among which a certain consumer is indifferent. Properties Characteristics of Indifference Curves : Indifference curves have the following four properties: 1. It can be seen from the Diagram 3.
Hence we can say that two indifference curves never intersect each other because they show different levels of satisfaction. But in real practice we see that consumer is not a rational human being. First, let one good be an example market e. An example of the type of utility function that has an indifference map like that above is. Once the consumer reaches this position he will not shift his purchase pattern, unless his income changes or unless the price of X or of Y becomes different. He is not only affected by economic variable but he is also affected by non-economic variables, namely, climatic condition, region, social custom, caste, language and region while taking the decisions. Indifference curves are widely used in microeconomics to analyze consumer preferences, the effects of subsidies and taxes, and a few other concepts.