indifference curve

presentation on indifference curve

1. INDIFFERENCE CURVE ANALYSIS Department of Business Management Dr. Hari Singh Gour Central University Sagar (M.P.) Presented by:- Mayank Kesharwani (y17282016) Pankaj Singh (y17282019) Roshni Aathiya (y17282027) Shilpi Rajak (y17282031) UNDER THE GUIDENCE OF : dr. BABITA YADAV

2. Table of Contents S. NO. CONTENT SLIDE NO. 1 WHAT IS CONSUMER’S EQUILIBRIUM 4 2 INDIFFERENCE CURVE 5-6 3 ASSUMPTIONS OF IC ANALYSIS OF CONSUMER’S EQUILIBRIUM 7 4 PROPERTIES OF INDIFFERENCE CURVES 8-13 5 INDIFFERENCE MAP 14 6 INCOME EFFECT 15 7 SUBSTITUTION EFFECT 16 8 PRICE EFFECT 17 9 BUDGET LINE 18 10 PRICE CONSUMPTION CURVE 19-20

3. 13 INCOME CONSUMPTION CURVE 21-22 14 DERIVATION OF THE DEMAND CURVE   23-25 15 ISO-QUANT , ISO -COST CURVE & ITS ASSUMPTIONS 26-30 16 COST ANALYSIS, COST FUNCTIONS, VARIOUS TYPE OF COST ANALYSIS 31-33 17 SHORT RUN AND LONG RUN CONCEPTS 34-35 18 REFERENCES 36

4. WHAT IS CONSUMER’S EQUILIBRIUM? Consumer’s equilibrium is defined as a situation when he maximises his satisfaction, spending his given income across different goods with the given prices.

5. INDIFFERENCE CURVE An Indifference curve is a curve which represents all those combinations of goods which gives same level of satisfaction to the consumers. Consider table 1,showing different combinations of apples and oranges. For Example:-

6. COMBINATION NUMBER OF APPLES NUMBER OF ORANGES A 1 10 B 2 7 C 3 5 D 4 4 TABLE 1

7. ASSUMPTIONS OF IC ANALYSIS OF CONSUMER’S EQUILIBRIUM Prices of goods are constant. Money income of the consumer is given and does not change. The consumer spends his income on two goods which are substitutes of each other. More of a good always gives more satisfaction to the consumer. This is called monotonic preference for a good. Perfect competition in the market. The consumer is rational. He always tries to maximise his satisfaction in given situation.

8. PROPERTIES OF INDIFFERENCE CURVES:- 1.) INDIFFERENCE CURVE SLOPES DOWNWARDS:- IC slops downward from left to right. It means that IC has a negative slope. It implies that if the consumer decides to have more of one good, he must have less of the other.

9. 2.) INDIFFERENCE CURVE IS CONVEX TO THE ORIGIN:- Indifference curve is convex to the origin because Marginal Rate of Substitution (MRS) Tends to decline. MRS refers to the rate at which the consumer is willing to sacrifice Good–Y for Good-X . For example :- As a consumer has more and more units of food, he is prepared to forego less and less units of clothing. This happens mainly because what for a particular good is satiable and as a person has more and more of a good ,his intensity of want for that good goes on diminishing. This diminishing marginal rate of substitution gives convex shape to the IC.

10. COMBINATION FOOD CLOTHING MRS A 1 12 ---- B 2 6 6 C 3 4 2 D 4 3 1

11. 3.) HIGHER INDIFFERENCE CURVE REPRESENT A HIGHER LEVEL OF SATISFACTION :- This is because combinations lying on a higher IC contain more of either one or both goods and more goods are preferred to less of them.

12. 4.) INDIFFERENCE CURVE CAN NEVER INTERSECT EACH OTHER:- No two IC will intersect each other because higher and lower level are cannot be equal to each other. Point A and B (on IC1)offer the same level of satisfaction. Point A and C (on IC2)offer the same level of satisfaction. IF A=B, and A=C, it implies that B=C. This is wrong as C is offering more of GOOD-1

13. 5.) INDIFFERENCE CURVE DOES NOT TOUCH X-AXIS OR Y-AXIS :- This is because IC analysis considers the consumption of two goods. Touching Y-Axis , IC would mean zero consumption of Good-X Touching X-Axis , IC would mean zero consumption of Good-Y

14. INDIFFERENCE MAP Indifference map refers to a set of indifference curve. Higher IC shows higher level of satisfaction . It corresponds to higher level of income of the consumer.

15. INCOME EFFECT:- In the above analysis of the consumer’s equilibrium it was assumed that the income of the consumer remains constant, given the prices of the goods X and Y. Given the tastes and preferences of the consumer and the prices of the two goods, if the income of the consumer changes, the effect it will have on his purchases is known as the income Effect.

16. THE SUBSTITUTION EFFECT: The substitution effect relates to the change in the quantity demanded resulting from a change in the price of good due to the substitution of relatively cheaper good for a dearer one, while keeping the price of the other good and real income and tastes of the consumer as constant. Prof. Hicks has explained the substitution effect independent of the income effect through compensating variation in income. “The substitution effect is the increase in the quantity bought as the price of the commodity falls, after adjusting income so as to keep the real purchasing power of the consumer the same as before. This adjustment in income is called compensating variations and is shown graphically by a parallel shift of the new budget line until it become tangent to the initial indifference curve.”

17. THE PRICE EFFECT: The price effect indicates the way the consumer’s purchases of good X change, when its price changes, A given his income, tastes and preferences and the price of good Y. This is shown in Figure 12.18. Suppose the price of X falls. The budget line PQ will extend further out to the right as PQ 1 , showing that the consumer will buy more X than before as X has become cheaper. The budget line PQ 2  shows a further fall in the price of X. Any rise in the price of X will be represented by the budget line being drawn inward to the left of the original budget line towards the origin.

18. BUDGET LINE It is a line which represents the alternative combination of purchasing of 2 goods with the given money income and price of 2 goods. Good Y Good X A B O Budget line

19.   Shows how consumption is affected by price changes (movement along demand curve). The consumer reacts to charges in the price of a good, his money income, tastes and prices of other goods remaining the same. Price effect shows this reaction of the consumer and measures the full effect of the change in the price of a good on the quantity purchased PRICE CONSUMPTION CURVE

20. Price Consumption Curve Y Cola X Apple Bl1 Bl2 Bl3 PCC O When, the price of good charges, the consumer would be either better off or worse off than before, depending upon whether the price falls or rises. In other words, as a result of change in price of a good, his equilibrium position would lie at a higher indifference curve in case of the fall in price and at a lower indifference curve in case of the rise in price. IC3 IC2 IC1

21. It Shows how consumption is affected by income changes (shifts from one demand curve to another). In indifference curve map income consumption curve is the locus of the equilibrium quantities consumed by an individual at different levels of his income. Thus, the income consumption curve (ICC) can be used to derive the relationship between the level of consumer’s income and the quantity purchased of a commodity by him. INCOME CONSUMPTION CURVE

22. With given prices and a given money income as indicated by the budget line P 1 L 1  the consumer is initially in equilibrium at point Q 1  on the indifference curve IC 1  and is having OM 1  of X and ON 1  of Y. Now suppose that income of the consumer increases. With his increased income, he would be able to purchase larger quantities of both the goods.  

23. DERIVATION OF THE DEMAND CURVE   A demand curve has been defined as a curve that shows a relationship between the quantity-demanded of a commodity and its price assuming income, the tastes and preferences of the consumer and the prices of all other goods constant. To draw an individual demand curve the information regarding prices of a commodity at different levels and their corresponding quantities demanded is required. The price-consumption curve can provide this information.

24. With the above information, we draw up the following demand schedule of the consumers.

25. Suppose a consumer has an income of Rs.240. If the price of the commodity X is Rs.60 per unit, the relevant price line will be LM1, because at this 2 units can be purchased. The consumer is in equilibrium at point el where the consumer buys 2 units of the commodity. Suppose the price of X falls to Rs.40 per unit. The price line shifts to LM2. The consumer attains a new equilibrium point e2 and buys 3 units of X. As the price of X further falls, the budget line shifts to the right and new successive points of equilibrium are attained where the consumer is in equilibrium at e3 and e4 and buys 5 and 7 units of commodity X when the price is Rs.30 and Rs.24 per unit respectively.

26. ISO-QUANT Isoquant is also called as equal product curve or production indifference curve or constant product curve. Isoquant indicates various combinations of two factors of production which give the same level of output per unit of time. The significance of factors of productive resources is that, any two factors are substitutable e.g. labour is substitutable for capital and vice versa. No two factors are perfect substitutes. This indicates that one factor can be used a little more and other factor a little less, without changing the level of output. It is a graphical representation of various combinations of inputs say Labour (L) and capital (K) which give an equal level of output per unit of time. Output produced by different combinations of L and K is say, Q, then Q=f (L, K). Just as we demonstrate the MRSxy in respect of indifference curves through hypothetical data, we demonstrate the Marginal Rate of Technical Substitution of factor L for K (MRTS  L,K  )

27. ASSUMPTIONS OF ISOQUANT There are two factor inputs labour and capital The proportions of factor are variable. Physical production conditions are given The Scale of operation is variable The state of technology remains constant The shape of Isoquant

28. In this section we examine the characteristics of isoquants , define the economic region of production and consider the special cases where the commodities can only be produced with least cost factor combination . We can see that the shape of isoquant plays an important a role in the production theory as the shape of indifference curve in the consumption theory. Iso quant map shows all the possible combinations of labour and capital that can produce different levels of output. The iso quant closer to the origin indicates a lower level of output. The slope of iso quant is indicated as K/L=MRSLK=MPL/MPK

29. ISO -COST CURVE Isocost curve is the locus traced out by various combinations of L and K, each of which costs the producer the same amount of money (C ) Differentiating equation with respect to L, we have  dK / dL = -w/r  This gives the slope of the producer’s budget line . Iso cost line shows various combinations of labour and capital that the firm can buy for a given factor prices. The slope of iso cost line = PL/Pk. In this equation , PL is the price of labour and Pk is the price of capital. The slope of iso cost line indicates the ratio of the factor prices. A set of isocost lines can be drawn for different levels of factor prices, or different sums of money. The iso cost line will shift to the right when money spent on factors increases or firm could buy more as the factor prices are given.

30. With the change in the factor prices the slope of iso cost line will change. If the price of labour falls the firm could buy more of labour and the line will shift away from the origin. The slope depends on the prices of factors of production and the amount of money which the firm spends on the factors. When the amount of money spent by the firm changes, the isocost line may shift but its slope remains the same. A change in factor price makes changes in the slope of isocost lines as shown in the figure .

31. COST ANALYSIS Cost is a sacrifice or foregoing that has occurred or has Cost is a sacrifice or foregoing that has occurred or has potential to occur in future, measured in monetary terms. Cost results in current or future decrease in cash or other assets, Cost results in current or future decrease in cash or other assets, or a current or future increase in liability. Cost is determined by various factors and each of this has Cost is determined by various factors and each of this has significant implications for cost decisions. An increase in any of these will affect cost pattern. The most important determinant is price(/s) of factor(/s) of The most important determinant is price(/s) of factor(/s) of production, which are uncontrollable, as they are largely production, which are uncontrollable, as they are largely determined by the external environment of any business. The marginal efficiency and productivity of these factors is The marginal efficiency and productivity of these factors is strongly related to their cost, higher the productivity or strongly related to their cost, higher the productivity or efficiency, lower will be the cost of the production, other things efficiency, lower will be the cost of the production, other things remaining the same.

32. COST FUNCTIONS They are derived from the production function, which describes the availability efficient methods of production at any one time. Economic theory distinguishes between short-run costs and long-run costs. Short-run costs are the costs over a period during which some factors of production (usually capital equipment and management) are fixed. The long-run costs are the costs over a period long enough to permit the change of all factors of production. In the long run all factors become variable. Both in the short run and in the long run, total cost is a multivariable function, that is, a total cost is determined by many factors. Symbolically we may write the long run cost function as C= f (X, T, Pf) And the short – run cost function as C = f (X, T, Pf, K) Where, C = total costs, X = output, T = technology, P f = prices of factors, and K = fixed factor

33. VARIOUS TYPE OF COST ANALYSIS I n economic analysis, the following types of costs are considered in studying costs data of a firm: Total Cost (TC) Total Fixed Cost (TFC) Total Variable Cost (TVC) Average Fixed Cost (AFC) Average Variable Cost (AVC) Average Total Cost (ATC) and Marginal Cost (MC)

34. SHORT RUN AND LONG RUN CONCEPTS The short run is a period during which one of the factors of production is considered to be constant (assuming that there are only two factors of production labor and capital) and the other is variable. Usually it is assumed that capital is the fixed factor in the short run. All costs are variable in the long run since factors of production, size of plant, machinery and technology are all variable. This in turn implies radical changes in the cost structure of the firm. The long run cost function is often referred to as the ‘planning cost function’ and the long run average cost (LAC) curve is known as the ‘planning curve’. As all cost are variable, only the average cost curve is relevant to the firm’s decision-making process in the long run. The long run consists of many short runs, e.g., a week consists of seven days and a month consists of four weeks and so on. So, the long run cost curve is the composite of many short run cost curves.

35. LONG RUN COST CURVES In the long run, all inputs (factors of production) are variable and firms can enter or exit any industry or market. Consequently, a firm's output and costs are unconstrained in the sense that the firm can produce any output level it chooses by employing the needed quantities of inputs (such as labor and capital) and incurring the total costs of producing that output level. The Long Run Average Cost (LRAC) curve of a firm shows the minimum or lowest average total cost at which a firm can produce any given level of output in the long run (when all inputs are variable). The LRAC curve is the envelope of the short run average total cost (SRATC) curves, where each SRATC curve is defined by a specific quantity of capital (or other fixed input).

36. CONCLUSION The above analysis shows that the theory of consumer’s behaviour is an extension of the theory of demand .The cardinal school explains that price alone is not the major determinant of quality demanded of a commodity but the final degree of utility to be derived from the commodity. The law diminishing marginal utility draws our attention to the fact that marginal utility decreases as more quantities of a commodity are acquired by a consumer.

37. REFERENCES JAIN, T., & OHRI, V. (2010). INDIFFERENCE CURVE ANALYSIS. AMBALA: V.K. GOOGLE . ( n.d .). Retrieved MARCH SUNDAY, 2018, from WWW.GOOGLE.COM: https://www.google.co.in/search?q=INDIFFERENCE+CURVE+ANALYSIS&dcr=0&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjr_Z7trPvZAhWI6Y8KHRtGBEAQ_AUIDSgE&biw=1366&bih=613 http://wikieducator.org/ISO_QUANT_AND_ISOCOST ISOQUANT CURVE,ISOCOST https://www.bing.com/search?FORM=INCOH2&PC=IC03&PTAG=ICO-e05ce23b&q=iso%20cost%20curve

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