Indifference curve

Indifference curve is famous technique to deal with the consumer behavior in case of consumption of two goods x and y. this technique is based on the ordinal approach. An indifference curve is the locus of various combinations of two goods x and y each combination yielding same or equal level of satisfaction to the consumer. Indifference curve is that curve which consists of different combination of two goods x and y at which consumer is able to derive same or equal level of satisfaction from each combination so that consumer will be indifferent to choose any one of the combinations available to him.

Indifference curve analysis can be preceded with the help of some assumptions:

·       Rationality- the consumer is a rational person who aims at satisfaction or utility maximization subject to the budgetary constraint.

·       Two commodities- there are two commodities x and y in consumption pattern which are not perfect substitutes but they can be substituted to some extent.

·       Satiable- particular want of a consumer is satiable (satisfied).

·       Total utility is a function of individual units of commodity- as unit consumption of individual commodities rises, total utility also rises.

·       Consistency- consumer is assumed to be consistent in his choice. For eg, if the consumer prefers A then B (i.e. A is better than B) than he doesn’t prefer B to A(i.e. B better than A) if both commodities are available in another situation. This behavior of consumer is said to be consistence.

·       Transitivity- if A>B;B>C; then A>C. this behavior of consumer in choice is said to be transitivity.

·       Non-satiety- consumer always prefers more of the commodity to less of the commodity. This behavior of consumer is said to be Non-satiety.

·       Marginal rate of substitution diminishes- the unit of that consumer will be ready to give up more units of x is called marginal rate of substitution.

Derivation

Indifference curve can be constructed with the help of hypothetical indifference schedule. An indifference schedule shows the different combination of two goods x and y at which consumer derives same or equal level of utility or satisfaction so that the consumer is indifference to choose any one of the combination available to him.

Indifference schedule

Combination of x1	units of x1	Units of Y1	MRSxy
A	1	20
B	2	15	5:1
C	3	11	4:1
D	4	8	3:1
E	5	6	2:1

in the above indifference schedule the consumer consumes 1 unit of x and 20 units of y as represented by combination A. in combination B as unit of x increases from 1-2 units consumption of y reduces from 20-15 units. The MRSxy is 5:1. Here MRS is defined as the units of commodity y that the consumer is willing to give up or sacrifice for additional unit of x. as unit of x increases from 1-2 there is gain in satisfaction (+∆x MUx) as unit of y reduces from 20-15 units there is loss in satisfaction (-∆y MUy). It is diminishing MRS due to which gain equals loss in satisfaction. As the gain in satisfaction is cancelled by the equal amount of loss the consumer is neither better off nor worse off. He is as before. Thus we can say that consumer derives same or equal level of satisfaction from 2 combinations a and b as a result, consumer is indifference to choose a or b.

           Similarly, in combination c, d, and e as unit of x increases to 3, 4, and 5 the units of y reduces to 11, 8 and 6 with MRSxy 4:1, 3:1 and 2:1 respectively. From all the combination a, b, c, d and e consumer derives same level of satisfaction so the consumer is indifferent to choose any one of the combinations.

    When the above 5 combinations of x and y goods are plotted on the graph measuring unit of x along x-axis and that of y along y-axis, we may obtain a downward slopping convexes shaped indifference curve as shown by the following figure.