Indiffernece Curve Analysis.pdf

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1. INDIFFERENCE CURVE AND ITS
PROPERTIES.
.
BY
PRITI KUMARI
ASSISTANT PROFESSOR
DEPARMENT OF ECONOMICS
PATNA WOMEN’S COLLEGE

2. INDIFFERENCE CURVE ANALYSIS:
EconomistslikeHicks,Allen,Samuelsons,Edgeworth
etchavecriticisedtheutilityanalysisonthefollowing
grounds:
•Utilityissubjective.
•IndivisibleGoods.
•Goodsarenotindependent.
•MarginalUtilityofMoneyisnotConstant.
•CardinalMeasurementisnotPossible.
•Consumerisnotsocalculative.
•IncomeEffectofPricechangeIgnored.

3. INTRODUCTION OF INDIFFERENCE CURVE
ICanalysisisamodernmethodtoanalyse
consumer’sbehaviour.Itisbasedonordinalutility.
Therearetwoconceptsofutilitycardinalandordinal.
Cardinalisusedtocountorindicatehowmanywhile
ordinalarewordsthatrepresentrankandorderina
set,scaleofpreferenceandthemarginalrateof
substitution.Ordinalutilityreferstothelevelof
satisfaction.Theordinalutilityfunctionmeansthe
utilitiesobtainedfromgoodscanbecomparedas
beinggreaterorlessorequalthroughthelevelof
satisfaction.

4. Thescaleofpreferenceisthequantitative
expressionofconsumer’sdesireforgoods.It
showsthewayinwhichanindividualconsumer
decidestospendhismoneyincomeonvarious
commodities.

5. Meaning of Indifference Curve
•AnICisthelocusofpoints–particular
combinationswhichyieldthesameutilityorlevel
ofsatisfactiontotheconsumer,sothatheis
indifferentastoparticularcombinationhe
consumes.Inotherwords,ICanalysisrefersto
thelocusofpointsrepresentingthevarious
combinationsoftwogoodswhichyieldthesame
levelofsatisfactiontotheconsumer.

6. •AccordingtoHicks:“Itisthelocusofthepoints
representingpartsofquantitiesbetweenwhichthe
individualisindifferentandsoitistermedasan
indifferentcurve.”
•AccordingtoLeftwhich:“Asingleindifference
curveshowstheindifferentcombinationofXand
Ythatyieldequalsatisfactiontotheconsumer.”

7. ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS
•Rationality.
•OrdinalUtility.
•Diminishingmarginalrateofsubstitution.
•Basedoncomparison.
•Consistency.

8. combination Good-X Good-Y MRSxy
A 1 15 _
B 2 11 4:1
C 3 8 3:1
D 4 6 2:1
E 5 5 1:1
WecanexplaintheconceptofICapproachwiththehelpoftableandMap:

9. HereweareexplainingMRSwiththehelpofIC
approach.ThemarginalrateofsubstitutionofYforX
(MRSxy)isdefinedastheamountofYtheconsumeris
justwillingtogiveuptogetoneadditionalunitsofXand
maintainthesamelevelofsatisfaction.
Fromtheabovetableitisseenwhentheconsumermoves
fromcombinationAtoB,theconsumerforgoes4unitsof
YgoodforoneunitgainofgoodX.Thus,marginalrateof
substitutioncomes4.Inthisway,whentheconsumer
movesfromBtoC,theconsumerforgoes3unitsofY
goodforanotherunitofXgood.

10. ThustheconsumerhasmoreandmoreunitofX
good,theconsumeriswillingtoaforgoeslessunits
ofYgoodasof2and1.InEcombination,
satisfactionoftheconsumeris1:1.Thusutility
gained=utilitylost.
ItcanalsobeexpressedasMRSxy=y/x
Inshort,asthestockofXincreasestheamountofY
inexchangewilldecrease.Inthisway,themarginal
rateofsubstitutiondiminishesandtheslopeof
indifferencecurveindicatesthesame.

11. Diagrammatic Representation
•Infig.givenbelowatpointA,consumerhas1unitofX
commodityand15unitsofYcommodity.AtpointB,hehas
2unitsofXcommodityand4unitsofYcommodity.
Accordingtothelawofdiminishingmarginalutility,MUof
additionalunitsofXcommodityisdiminishingand
marginalutilityofYstartsincreasing.Therefore,consumer
willbewillingtogiveuplessandlessofYcommodityfor
everyadditionalunitsofXcommodity.Inotherwords,
marginalrateofsubstitutionofXcommodityforY
commoditydiminishes.

12. Diagram of indifference curve

13. PROPERTIES OF INDIFFERENCE CURVES:
1.IndifferenceCurveSlopefromLeftDownwardtoRight.
ICslopefromleftdownwardtorightmeanswhenthe
amountofonecommodityinthecombinationincreasesthe
amountofothercommodityreduces.Inthefiggivenbelow
atpointA,theconsumerbuysOXofcommodityXandOY
ofcommodityYAshemovesfromAtoBandfurtherfor
attainingmoreofXcommodity,heisreadytoforgolesser
andlesserofcommodityY.Itisonlyinthiscasethathecan
beindifferentbetweenAandBbecauseincreasein
commodityXleadstodecreaseincommodityY.

14. Convex and concave shape of indifference curve0
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15. 3.IndifferenceCurvewillnotToucheitherX-axisorY-
axis.TheICwillnottoucheitherX-axisorY-axis,as
wehaveassumedthattheindividualisinterestedin
differentcombinationsoftwocommoditiesasseeninfig.
below,Ifittoucheseitheroftheaxis,itwillmeanthatthe
consumerisinterestedinonecommodityonly.Inthefig.
ICtouchesX-axisatpointA,hewillbesatisfiedwithOA
unitsofXcommodityandhasnopreferenceforY
commodity.Similarly,atpointB,hewillhaveOBunitsof
YcommodityandnoneofX.Thisnormallydoesnot
happen.

16. Indifference curve will not touch either x-axis and y-
axis.

17. 4.IndifferenceCurveneitherTouchesnorIntersects
EachOther.AnotherpropertyofICisthatICcanneithertouch
norintersecteachothersothatonlyoneICcanpassthroughanyone
pointoftheindifferencemap.
Infig.givenbelowtwoIndifferencescurvesIC1andIC2intersect
eachotheratpointP.OnindifferencecurveIC2combinationMis
preferabletocombinationNonindifferencecurveIC1.Thereason
forthepreferenceisthuscombinationMliesonthehigher
indifferencecurve.Similarly,combinationEismorepreferredonIC1
tocombinationFonIC2.

18. Indifference Curve neither Touch nor Intersect Each
Other.

19. 5. Higher Indifference Curve represents Higher Level of
Satisfaction.An indifference curve which lies above and right to
another indifference curve represent a higher level of satisfaction.
In other words, the consumer will prefer the combination which
lie on a higher indifference curve as compared to the
combinations lying on a lower indifference curve.

20. Higher Indifference Curve represents Higher Level of
Satisfaction.

21. Inthisfig.IC2isahigherindifferencecurvethantheIC1,thus
combinationKhasbeentakenonhigherindifferencecurveandJ
onalowerindifferencecurve.CombinationKwillprovidemore
satisfactiontotheconsumerinsteadofcombinationJwhichlieson
alowerindifferencecurve.ItissobecausecombinationK
representsmoreoftwogoodsi.e.,good-Xandgood-Ythanthe
combinationJ.Therefore,theconsumermustpreferKonIC2
insteadofJonIC1.

22. 6.IndifferenceCurvesneednotbeParalleltoEachOther.
Thisisbecausetheyarenotbasedonthecardinalnumbersystem
ofmeasurabilityofutility.Secondly,therateofsubstitution
betweentwocommoditiesneednotbethesameinall
indifferenceschedules.FromthisitfollowsthatICmaybe
drawninanywayparalleltoeachotherorotherwise.Theonly
conditionisthatthetwoICshouldnottouchorcuteachother.
Thisisexplainedinthisdiagram,wheretherearethreedifferent
indifferencecurvesasIC1,IC2,IC3whicharenotparallelto
eachother.

23. THANK YOU