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.
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