An indifference curve. What is Indifference Curve: Definition, Assumptions, Properties 2022-12-22
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An indifference curve is a graphical representation of a consumer's preferences for two goods or services. It shows the combination of the two goods that would provide the same level of satisfaction or utility to the consumer. The indifference curve is a useful tool in economics because it helps to understand how a consumer's preferences change as the price or availability of goods changes.
An indifference curve is typically plotted on a graph with one good on the x-axis and the other good on the y-axis. The curve itself represents all the combinations of the two goods that provide the same level of satisfaction to the consumer. The higher the curve, the more of both goods the consumer is willing to consume to maintain a given level of satisfaction.
There are a few key properties of an indifference curve that are important to understand. First, an indifference curve is downward sloping, which means that as the quantity of one good increases, the quantity of the other good must decrease in order for the consumer to maintain the same level of satisfaction. This is because, as the quantity of one good increases, the consumer's utility or satisfaction from consuming that good decreases, so they must compensate by consuming more of the other good.
Second, indifference curves are convex to the origin, which means that they curve inward as they approach the x and y axes. This reflects the fact that, as the quantity of one good increases, the marginal utility or satisfaction gained from consuming that good decreases. As a result, the consumer is willing to give up more of the other good in order to maintain the same level of satisfaction.
Finally, indifference curves are non-intersecting, which means that they do not intersect or overlap with one another. This reflects the fact that a consumer's preferences for different combinations of goods are unique and cannot be ranked equally.
Indifference curves are often used in economic analysis to understand how consumers make decisions about what to buy and how much to buy. For example, if the price of one good increases, the consumer may choose to substitute a cheaper alternative in order to maintain their desired level of satisfaction. Indifference curves can also be used to compare the preferences of different consumers and to understand how changes in the market affect consumer behavior.
Overall, indifference curves are a valuable tool for understanding consumer behavior and making economic decisions. They help to illustrate how a consumer's preferences change as the price and availability of goods change, and how consumers make trade-offs between different goods in order to maximize their satisfaction.
Indifference curves and budget lines
Explain the Marginal Rate of Substitution. 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 Indifference curve map We can also show different indifference curves. To understand their function, start by thinking about the substitution effect with this question: How would Ogden change his consumption if the relative prices of the two goods changed, but this change in relative prices did not affect his utility? However, they can, and do, identify what choices would give them more, or less, or the same amount of satisfaction. The movement from the original choice A to point C shows how Quentin substitutes toward more present consumption and less future consumption in response to the lower interest rate, with no change in utility. In an intertemporal choice, each indifference curve shows the combinations of present and future consumption that provide a certain level of utility. I4 gives the highest net utility. As we know, all combinations of good A and good B that lie on the same indifference curve make the consumer equally happy.
What is Indifference Curve: Definition, Assumptions, Properties
Updated Jun 26, 2020 Published May 15, 2017 Indifference curves are graphs that represent various combinations of two commodities which an individual considers equally valuable. What Is an Indifference Curve? If the price of petrol rises, then it is relatively cheaper to go by bus. Many students find it easiest to first select the tangency point C where the original indifference curve touches the dashed line, and then to draw the original indifference curve through A and C. Thus, while indifference curves have the same general shape—they slope down, and the slope is steeper on the left and flatter on the right—the specific shape of indifference curves can be different for every person. However, Quentin has just realized that his expected rate of return was unrealistically high. Therefore the indifference curve is convex towards the origin. In this case, where the price of one good increases, buying power is reduced, so the income effect means that consumption of both goods should fall if they are both normal goods, which it is reasonable to assume unless there is reason to believe otherwise.
The dashed line is drawn parallel to the new budget set, so that its slope reflects the lower rate of return, but is tangent to the original indifference curve. A choice like G is affordable to Lilly, but it lies on indifference curve Ul and thus provides less utility than choice B, which is on indifference curve Um. When the price of pizza increased, Ogden consumed less of it, for two reasons shown in the exhibit: the substitution effect of the higher price led him to consume less and the income effect of the higher price also led him to consume less. If the consumer decided to cut down the quantity of X commodity and keep the utility level unchanged, he should substitute some units from the Y commodity. Therefore, the consumer is indifferent over these two bundles of commodities. Further, this assumption shows that consumers know all relevant information on the market. If oranges get cheaper, people fire up their juicing machines and ease off on other fruits and foods.
People cannot really put a numerical value on their level of satisfaction. On the other hand, if the shape is less, the degree of substitutability is quite high. As a result, the more preferred option is the one chosen, as it is no longer the less preferred option. The movement from the original choice A to point C shows how Quentin substitutes toward more present consumption and less future consumption in response to the lower interest rate, with no change in utility. Interaction can result in a person being more interested in one option than the other, resulting in an erosion of transitivity. Since one point on the higher indifference curve is preferred to one point on the lower curve, and since all the points on a given indifference curve have the same level of utility, it must be true that all points on higher indifference curves have greater utility than all points on lower indifference curves. Although the substitution and income effects are often discussed as a sequence of events, it should be remembered that they are twin components of a single cause—a change in price.
Many students find it easiest to first select the tangency point C where the original indifference curve touches the dashed line, and then to draw the original indifference curve through A and C. When an item is complementary for example, a car or fuel , its use cannot be restricted. Notice that the lower indifference curve could have been drawn tangent to the lower budget constraint point D or point F, depending on personal preferences. The consumer is assumed to be indifferent between the two combinations of goods, meaning that they would be equally satisfied with either option. The Individuality of Indifference Curves Each person determines their own preferences and utility. Indifference curve of a rational consumer is convex towards the origin.
Some students find this approach more intuitively clear. Sketching Substitution and Income Effects Indifference curves provide an analytical tool for looking at all the choices that provide a single level of utility. Petunia starts at choice A, the tangency between her original budget constraint and the lower indifference curve Ul. The movement from A to C is the substitution effect: in this case, future consumption has become relatively more expensive, and present consumption has become relatively cheaper. Now, draw the original indifference curve, so that it is tangent to both point A on the original budget line and to a point C on the dashed line. In effect, his intertemporal budget constraint has pivoted to the left, so that his original utility-maximizing choice is no longer available. Understanding Indifference Curves and How to Plot Them.
Understanding Indifference Curves and How to Plot Them
To understand why this is the case, we can look at what would happen if they did intersect. An Indifference curve shows the various commodity combinations which give the same level of satisfaction. They eliminate any need for placing numerical values on utility and help to illuminate the process of making utility-maximizing decisions. The substitution effect of an interest rate increase is to choose more future consumption, since it is now cheaper to earn future consumption and less present consumption more savings , since the opportunity cost of present consumption in terms of what is being given up in the future has increased. One final note: The helpful dashed line can be drawn tangent to the new indifference curve, and parallel to the original budget line, rather than tangent to the original indifference curve and parallel to the new budget line. Indifference curves like Um are steeper on the left and flatter on the right. He is thinking about spending some or all of it on a vacation in the present, and then will save the rest for another big vacation five years from now.
Theoretically, the possibility exists that a concave indifference curve or even a circular curve can exist. However, the income effect of a higher price for pizza meant that he wished to consume less of both goods, and this factor, taken alone, would have encouraged Ogden to consume fewer haircuts. The dashed line in the diagram, and point C, are used to separate the substitution effect and the income effect. Taking both effects together, the substitution effect is encouraging Quentin toward more present and less future consumption, because present consumption is relatively cheaper, while the income effect is encouraging him to less present and less future consumption, because the lower interest rate is pushing him to a lower level of utility. In microeconomics, difference curves are heuristic devices used to demonstrate consumer preferences and limitations of a budget. Will Quentin react to the lower rate of return by saving more, or less, or the same amount? The minimum required proportion of the goods will be shown by a point through which the indifference curve will pass.
Key Concepts and Summary An indifference curve is drawn on a budget constraint diagram that shows the tradeoffs between two goods. The utility-maximizing choice along a budget constraint will be the point of tangency where the budget constraint touches an indifference curve at a single point. Again, the language of substitution and income effects provides a framework for thinking about the motivations behind various choices. The Shape of an Indifference Curve The indifference curve Um has four points labeled on it: A, B, C, and D. Indifference Curve Pdf: Who introduced Pioneers of this approach are Edgeworth, Fisher, Slutsky, Hicks, and Allen. If oranges become more expensive, fruit-lovers scale back on oranges and eat more apples, grapefruit, or raisins. The income effect assuming normal goods encourages less of both present and future consumption.
