The slope of an indifference curve shows the rate of substitution between two goods, i. The same argument holds good in this case as developed above in the case of intersection of indifference curves. If we move from O to X we see that the price of X decreases and reverse is the case when we move towards O. The graph shows a combination of two goods that the consumer consumes. If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. So being that they are different curves, we expect them to have different utilities.
In the upward sloping curve too, the different points on the curve differ in significance because as he moves from point A to B, he gets more of x and more of y commodities. Indifference curves, like many aspects of contemporary , have been criticized for oversimplifying or making unrealistic assumptions about human action. Hence, this method of measuring utility or satisfaction is more practical and realistic. Developed by the Irish-born British economist , it is widely used as an tool in the study of consumer behaviour, particularly as related to. On the contrary we shall see what would be the result if the curve is concave. In case of perfect substitutes, the indifference curves are parallel straight lines because the consumer equally prefers the two goods and is willing to exchange one good for the other at a constant rate. It is not based on the psychological assumptions, namely, cardinal utility, subjectivity of utility, etc.
The combinations are A, B, C, D and E. In combination B he has 1 unit more of X and sacrifices 1 unit of Y and so on and so forth. Some of these important properties are as follows: 1. An indifference curve, since it represents level of satisfaction, is a subjective phenomenon. It is superior to utility analysis based on cardinal approach. An indifference schedule shows different combinations of two commodities X and Y showing the same level of satisfaction.
Therefore, the indifference curve cannot slope upward from left to right. The indifference curve is plotted simply by asking an individual what combination of goods he prefers, for example: 10 hamburgers and 5 films; 15 burgers and 3 movies, 20 hamburgers and 2 movies, or 5 hamburgers and 7 movies. Hence, you get increasing marginal rate of substitution of X for Y. The total satisfaction of the consumer is therefore bound to be greater at Q than at P. The various combinations that provide equal satisfaction to the consumer are grouped into Two sets. When the man drinks 12 cup of coffee, he consumes 1 cigarette every day. Non satiety Satiety means saturation.
We, therefore, conclude that indifference curves cannot cut each other. The better substitutes the two goods are for each other, the closer the indifference curve approaches to the straight-line so that when the two goods are perfect substitutes, the indifference curve is a straight line. For this reason, an indifference curve always has a negative slope. Now, can you tell which of these indifference curves give higher satisfaction? So, I may beequally happy with 2 puppies and 2 piles of garbage as I would bewith 5 puppies and 5 piles of garbage. Many core principles of appear in indifference curve analysis, including individual choice, marginal utility theory, income and substitution effects, and the subjective theory of value. Indifference curves are drawn based on the consumer's presumed indifference.
The curve that joins the various equilibrium points is known as the price consumption curve. This is reflected in the indifference curves. Hence we can say that the slopes of two indifference curves should not be necessarily parallel to each other. Hence the study of all these effects makes the indifference curve analysis more superior to the utility analysis. Budget Line or Price Line of Indifference Curves: Budget line or price line is an important concept in the indifference curve analysis.
We can refer to each curve by its utility value, call them x and y. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. As stated above, when two goods are perfect substitutes of each other, the indifference curve is a straight line on which marginal rate of substitution remains constant. If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. We can see that when X1 amount of commodity X was consumed, Y1 amount of commodity Y was also consumed.
If a firm or individual prefers less than the tools of utility or profit maximization will not make accurate predictions. Also, if the individual has the option to increase the number of pens without decreasing the number of pencils means that is now in a new indifference curve, which reported higher profit than the last. We therefore conclude that indifference curves cannot cut each other. It follows that the combination F will be equivalent to E in terms of satisfaction. So, I may beequally happy with 2 puppies and 2 piles of garbage as I would bewith 5 puppies and 5 piles of garbage.
The consumer will always try to move up in the indifference map so that he can occupy as much as possible the topmost curve, as higher curves give larger satisfaction in the difference map. The higher the indifference curves are, the larger the quantities of both goods. Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget. As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin. The marginal significance of x should become smaller and smaller as he possesses larger and larger quantities of x.
Consumers are always assumed to be more satisfied with achieving bundles of goods on higher indifference curves. Such curves are in contradiction to the assumption that the consumer buys two goods in combinations. In the diagram ΔY and ΔX show the decrease in commodity Y and increase in commodity X when both are substituted in order to remain on the same level of satisfaction. Point E, on the other hand, has a higher satisfaction than rest of the points, but is not reachable due to the existing conditions of the customer, such as earnings or budget limit. Meaning and Definitions of Indifference Curves: A curve showing different combinations of two commodities giving the same level of satisfaction is called indifference curve.