Contents
We thus conclude that indifference curves are usually convex to the origin. Our assumption concerning diminishing MRS and the convexity of indifference curves is built upon the thought of concrete behavior of the normal customer. If indifference curves were concave or straight lines, the customer would yield to monomania, that is, he would purchase and consume only one good. We know that buyers in actual world do not usually purchase and consume one good. It is for this motive that we discard indifference curves of concave or straight-line shapes and adopt that indifference curves are usually convex to the origin. In other words, if they have lots of good B, they are more keen to trade a few of it in to get an additional unit of excellent A and vice versa.
This is true because consumers usually prefer more of something to less of it. Where higher indifference curves represent larger quantities of goods than do lower indifference four properties of indifference curve curves. When two commodities are substitutes , their indifference curve will be a straight line. In this case, the marginal rate of substitution remains constant.
Indifference curves slop downward to the right
Another important property of indifference curves is that they are usually convex to the origin. In other words, the indifference curve is relatively flatter in its right-hand portion and relatively steeper in its left-hand portion. This property of indifference curves follows from assumption 3, which is that the marginal rate of substitution of X for Y diminishes as more and more of X is substituted for Y.
- When it occurs, it is known as the marginal rate of substitution .
- As mentioned above, Samaira initially agreed to give up 6 units of books in exchange for an additional unit of food.
- The table given below is an example of indifference schedule and the graph that follows is the illustration of that schedule.
- When two commodities are substitutes , their indifference curve will be a straight line.
- The following points highlight the top six properties of indifference curve.
- An indifference curve essentially slopes downwards, which indicates that the total utility generated from all the combinations is the same.
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. Hicks and Allen criticized Marshallian cardinal approach of utility and developed indifference curve theory of consumer’s demand. Likewise, the combinations B and C will give equal satisfaction to the consumer; both being on the same indifference curve IC1.
Four Properties Of Indifference Curves
An indifference curve is a graphical representation of how much of one good or service a consumer is willing to give up in order to receive more of another good or service. In other words, it shows the different combinations of two goods or services that a consumer is willing to accept as being equal in terms of satisfaction. Fourth, higher indifference curves represent higher levels of utility than lower ones. In other words, if you have two options and one option is represented by a point on a higher indifferent curve than the other option, then you prefer the first option . On the contrary we shall see what would be the result if the curve is concave. In the Figure 5, the indifference curve is convex to the origin.
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. If they could cross, it would create large amounts of ambiguity as to what the true utility is. Indifference curves are not influenced by market or economic circumstances.
Curves I2 and I3, until he reaches the saturation upon S where his total utility is the maximum. If the consumer increases his consumption beyond X and Y his total utility will fall. Hence Q represents a more valued and preferred combination of oranges and bananas than P. As all the points on one Indifference Curve represents equal satisfaction, therefore every point on IC2 represents a combination, preferred to that represented by any point on IC. An Indifference Curve to the right represents a preferred position and therefore a consumer will always try to move on the indifference map as much to the right as possible.
Top 6 Properties of Indifference Curve (With Diagram)
This makes them indifferent towards their choices, hence the name, Indifference Curve. The curve is drawn such that it is always sloping in the downward direction. Indifference curve analysis assumes diminishing marginal rate of substitution. Due to this assumption, an indifference curve is convex to the origin. In the above figure, the quantity of good X is measured along the X-axis, and the quantity of good Y is measured along Y-axis.
This happens essentially when two or more goods provide the same amount of satisfaction. There are several analyses that have taken place for Indifference Curves that have deduced the fact as to how the income of a consumer can change their preferences. Practically, as their income increases, the curve goes higher as well.
This means that the person prefers more of one thing over less of it (e.g. they would rather have 10 apples than 5 apples). This property is also known as monotonicity or diminishing marginal utility. This can be explained by considering a hypothetical situation where two indifference curves intersect. On the indifference curve , there can be several other points in between the points a, b, c, d, and e, which would yield the same level of satisfaction to the consumer.
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. Therefore, indifference curves are convex to the origin (see Fig. 2.6). It must be noted that MRS indicates the slope of indifference curve.
This means that the person has considered all possible combinations of the two things and has ranked them according to their preferences. If two products are perfect complements of each other, say a phone and a tablet, then in such a case, the curve is L-shaped and convex to the origin. As mentioned above, Samaira initially agreed to give up 6 units of books in exchange for an additional unit of food. From the table, you can observe that in subsequent combinations, the MRS is 2 and 1. The MRS or Marginal Rate of Substitution can be defined as the rate at which a consumer is prepared to exchange a product, M for another product, N.
Since A is on a higher indifference curve and to the right of N. A single indifference curve concerns only one level of satisfaction. But there are a number of indifference curves, as shown in Figure 12.2. The curves that are farther away from the origin represent higher levels of satisfaction as they have larger combinations of X and Y.
To illustrate the indifference curve, let us consider two goods X and Y. The following table shows the hypothetical indifference schedule. Henceforth an indifference curve is a curve screening the different combinations of two products that yield identical satisfaction or total utility to a consumer.
Consumer can rank his/her preferences on the basis of satisfaction yielded from each combination of goods. Thus, the consumer will definitely prefer A to B, that is, A will give more satisfaction to the consumer than B. But the two indifference curves cutting each other lead us to an absurd conclusion of A being equal to Bin terms of satisfaction. We therefore conclude that indifference curves cannot cut each other. If the marginal rate of substitution had increased, the Indifference Curve would have been concave to the origin. If the marginal rate of substitution had remained constant, the Indifference Curve would have been a diagonal straight line at 45° angle.
Perfect Complementary Goods have L-Shaped Indifference Curves
An indifference curve is a graphical representation of how a person feels about two different things. The curve shows the different combinations of the two things that the person is indifferent between. The main reason that an Indifference Curve goes higher is that a consumer’s income rises. It is when https://1investing.in/ this happens that a consumer can actually afford to get more for themselves. This is how they will be able to consume more of the goods or products and keep themselves satisfied. The theory of this is as simple as when the budget or the spending capacity of a consumer rises, their needs do so as well.
The marginal determination rule says that if a further unit of an exercise yields greater benefit than its cost, it ought to be pursued. She is spending all of her finances, but she is not maximizing utility. Because her marginal price of substitution exceeds the speed at which the market asks her to surrender snowboarding for horseback driving, she will improve her satisfaction by moving to point D. Having reached level X, Ms. Bain clearly wouldn’t hand over nonetheless more days of snowboarding for additional days of using. Beyond point X, her indifference curve is flatter than the budget line—her marginal rate of substitution is lower than the absolute value of the slope of the budget line. The Slope of the curve is referred because the Marginal Rate of Substitution.
The convexity rule implies that as the consumer substitutes X for Y, the marginal rate of substitution diminishes. It means that as the amount X is increased by equal amounts that of Y diminish by smaller amounts. We have taken only one schedule, but any number of schedules can be taken for the two commodities.
Combinations of two goods on the curve provide Jack with the same level of satisfaction . The slope of the curve at any given point represents utility for any combination of two goods. When it occurs, it is known as the marginal rate of substitution .
Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget. An indifference curve denotes a set of different combinations of two commodities or goods, providing the same level of satisfaction to the consumer. Since all consumption bundles give an equal amount of utility, the consumer is indifferent to all combinations. An indifference curve is a graphical representation of various combinations or consumption bundles of two commodities. It provides equivalent satisfaction and utility levels for the consumer.