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.