It means the consumer would like to get maximum satisfaction out of his total what are the properties of indifference curve income. The number of units of one good a consumer is willing to give up to get one more unit of another good and maintain the same level of satisfaction. One of the three major characteristics of an indifference curve.
In other words, we can say that the combination of goods which lies on a higher indifference curve will be preferred by a consumer to the combination which lies on a lower indifference curve. At point (a) on the indifference curve, the consumer is satisfied with OE units of rice and OD units of beans. He is equally satisfied with OF units of rice and OK units of beans shown by point b on the indifference curve. Thus, the consumer can reach the highest scale of preference marked as IC2 and establish equilibrium at point P where the consumes OM of commodity X and ON of commodity Y.
1 Fundamental Assumptions about Individual Preferences
- Each curve on the right-hand side represents a high level of satisfaction as compared to a curve on the left.
- Plotting on a graph the different combinations that contain more of one commodity and less of another would give a downward-sloping curve.
- One of the properties of the indifference curve is that it is strictly convex and never concave.
- We know that the marginal utility of consuming a good decreases as its supply increases (see also diminishing marginal utility).
- People can be constrained by limited budgets so they can’t purchase everything so a cost-benefit analysis must be considered instead.
When an individual consumes goods and services, the satisfaction gained or lost from consumption is called utility. Consumer preferences are defined by the consumption bundles that consumers face. A collection bundle is a bundle that maximizes the consumer’s total utility, given the consumer’s budget constraints.
We can see that when X1 amount of commodity X was consumed, Y1 amount of commodity Y was also consumed. When the consumer increased the consumption of commodity X to X2, the amount of commodity Y fell to Y2. And, diminishing marginal rate of substitution states that the rate by which a person substitutes X for Y diminishes more and more with each successive substitution of X for Y. And, indifference curve theory assumes that the consumer has not reached the point of satiety. It implies that the consumer still has the willingness to consume more of both the goods.
Indifference curves neither Intersect nor become tangent to one another:
A curve farther out from the origin represents a higher level of satisfaction than a curve closer to the origin. Choice theory formally represents consumers by a preference relation, and use this representation to derive indifference curves showing combinations of equal preference to the consumer. Indifference curves have been criticized for making unrealistic assumptions about consumer behavior. Some economists argue that every choice indicates a preference for one combination over another rather than indifference to the outcome. This would make an indifference curve useless for any analysis.
- Are there more efficient—that is, less expensive—ways to achieve these goals?
- The consumer would definitely prefer to have a combination on Point T, provident he can purchase it.
- As we defined the indifference curve gives the same level of satisfaction with the different points of combinations of two commodities A, B, C, D, and E combinations.
- If indifference curves are allowed to intersect, it will break down the assumptions of transitivity and consistency.
These arguments about the shapes of indifference curves and about higher or lower levels of utility do not require any numerical estimates of utility, either by the individual or by anyone else. Given these gentle assumptions, a field of indifference curves can be mapped out to describe the preferences of any individual. The indifference curve analysis work on a simple graph having two-dimensional. Each individual axis indicates a single type of economic goods. If the graph is on the curve or line, then it means that the consumer has no preference for any goods, because all the good has the same level of satisfaction or utility to the consumer.
Assumptions of consumer preference theory
Combination at point Q contains more of both the goods (X and Y) than that of the combination at point S. We know that total utility of commodity tends to increase with increase in stock of the commodity. Thus, utility at point Q is greater than utility at point S, i.e. satisfaction yielded from higher curve is greater than satisfaction yielded from lower curve. In the above figure, IC1 and IC2 are two indifference curves, and IC2 is higher than IC1.
An Indifference map shows the different scales of preference of the consumer. The consumer has to reach the highest possible scale of reference. Since grapes have gone cheaper, the consumer would like to purchase more grapes in place of apples. Grapes are priced at $6 per kg whereas apples are priced at $5 per kg. The shape of the curve is determined by the rate of substitution between the two commodities. It tries to solve how a consumer reaches the equilibrium point without measuring the utility in Cardinal numbers.
Higher Indifference Curves Are Preferred to Lower Ones
That is, one unit of one good is just as good as one unit of another good. For most consumers, a teaspoon of one salt is always just as good as a teaspoon of the other. Before we proceed to determine the consumer’s equilibrium through this approach, let us understand some useful concepts related to Indifference Curve Analysis. It is assumed that the consumer has fixed amount of money, all of which is to be spent only on two goods. It is also assumed that prices of both the commodities are constant.
When he started consuming two cigarettes a day, his coffee consumption dropped to 8 cups a day. In the same way, we can see other combinations as 3 cigarettes + 5 cup coffee, 4 cigarettes + 3 cup coffee and 5 cigarettes + 2 cup coffee. According to this theory, utility is a psychological phenomenon and thus it is unquantifiable.
Representing preferences graphically is a great way to understand both preferences and how the consumer choice model works—so it is worth mastering them early in your study of microeconomics. An indifference curve is convex to the origin because of diminishing MRS. MRS declines continuously because of the law of diminishing marginal utility. As seen in Table 2.6, when the consumer consumes more and more of apples, his marginal utility from apples keeps on declining and he is willing to give up less and less of bananas for each apple.
The consumer always tends to move to a higher indifference curve seeking for higher satisfaction. The concept of indifference curve analysis was first propounded by British economist Francis Ysidro Edgeworth and was put into use by Italian economist Vilfredo Pareto during the early 20th century. A young boy might be indifferent between possessing two comic books and one toy truck or four toy trucks and one comic book. Both of these combinations would be points on the indifference curve of the young boy. Thus, it does not consider market behaviour in the analysis of consumer behaviour. For example, a change in the price of other commodities in the market may affect the purchase of the commodities being considered.
Indifference curves are widely used in microeconomics to analyze consumer preferences, the effects of subsidies and taxes, and a few other concepts. Although they come in many shapes and sizes, most of them share a few important properties. Thus, we will look at the four most important properties of indifference curves in more detail below.
Here, we understand that all three products resting in the indifferent curve give him the same satisfaction. However, his preference for those combined products can be arranged in the order of preference. Indifference curves have been criticized for oversimplifying or making unrealistic assumptions about human behavior like many aspects of contemporary economics.
We can clearly see that the rate of decrease in consumption of coffee is not the same as rate of increase in consumption of cigarette. Similarly, rate of decrease in consumption of coffee has gradually decreased even with constant increase in consumption of cigarette. Risks and uncertainties in the market and individual’s life are inevitable. Quickonomics provides free access to education on economic topics to everyone around the world.