indifference curve analysis
Post on 03-Dec-2014
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INDIFFERENCE CURVE ANALYSIS
Indifference Curve
• Marshall’s Marginal Utility theory was severely criticised for its assumption.
• Hicks and Allen presented a scientific treatment to the consumer theory on the basis of Ordinal Utility, graphically represented by indifference curves.
“ An Indifference Curve shows a set of different combinations of quantities of two goods that yield the same satisfaction to the consumer”.
Assumptions of Indifference Curve
• Rationality• Ordinal Utility• Diminishing Marginal rate of Substitution• Consistency of choice• Transitivity• Non-Satiety
Indifference Curve An Indifference Curve is a curve which
represents different combinations of goods which give same satisfaction to the consumers.
Indifference ScheduleCombination Mango Orange A
1 12 B 2 6 C 3 4 D 4 3 E 5 2
Consumer’s Indifference Curve
Y
Orange
0 Mango X
Indifference Map
• A family of Indifference curves is called an Indifference Map.
• Each indifference curve reflects a different level of total utility.
• A higher indifference curve shows a greater amount of satisfaction.
An Indifference Map
Y
Goods Y IC3
IC2
IC1
0 Goods X X
Features / Properties of Indifference Curve
1. Indifference curves slope downwards from left to right. Y
Orange
ICMango X
It can also be proved by Contradiction:Qy Qy Qy
B B A A B A
0 Qx 0 Qx 0
2. Indifference curves are always convex to the origin.
• Diminishing Marginal rate of Substitution (MRS)
A Commodity Y (Orange) B Diminishing MRS
C
IC Commodity X (Mango)
3. Higher indifference curve represents higher level of satisfaction.
(OX2+OY1)>(OX1+OY1)Y1 L M
Commodity Y
IC2 IC1
X1 X2O Commodity X
4. Indifference curves do not intersect each other.
A=B and A=C
Commodity Y A
C IC2 B
IC1
Commodity X
Exceptions to Indifference Curve Analysis1. Substitute Goods
A AB=CD=EFB C
Commodity YD E
FIC
0 1 2 3 4 Commodity X
2. Complementary Goods
Commodity 2 B IC2
Y 1 A IC1
0 1 2 Commodity X
3. Bad Goods IC2 IC1
B IC3Income (Good)
A C
0 Pollution ( Bad)
4. Neutral Goods.
Neutral Good Commodity Commodity
Good Commodity Neutral Commodity
# Point of Bliss Point most preferred by the consumer on
Indifference Map.
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