When the price of a commodity declines it increases the real income of the consumer which causes income effect and secondly, consumer purchases more of cheaper commodity than the dearer one. This is due to the concept of the diminishing marginal rate of substitution between the two goods. If two goods are then the indifference curves will be L-shaped. 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 elbows of the curves are.
Straight-line indifference curves of perfect substitutes are shown m Fig. Whenever there is change in the price of a commodity the effects are divided into two categories, namely, income effect and substitution effect. An indifference curve is a contour line that slopes downward from left to right, showing equal levels of satisfaction on each of its points, with the given amount of income spent on different combinations. It happens because if the consumer decides to have more units of one good say apples , he will have to reduce the number of units of another good say bananas , so that total utility remains the same. } These examples might be useful for individual or aggregate demand. The various combinations that provide equal satisfaction to the consumer are grouped into Two sets.
Indifference curves do not cross each other and they never intersect. Utility analysis is easy to understand, but indifference curve analysis is complicated one. The vertical portion of the I 1, curve reveals that no amount of reduction in good Y will lead even to a slight increase in good X. Indifference curves can never intersect each other: As two indifference curves cannot represent the same level of satisfaction, they cannot intersect each other. As seen in Table 2. Therefore, two indifference curves cannot intersect each other. That is, the consumer has no for one combination or bundle of goods over a different combination on the same curve.
Indifference curve is always convex towards the point of origin. These are studied in the assumptions of preference ordering. The Journal of Legal Studies. Correspondingly, equilibrium point will also shift right words as shown in the following figure. It is unrealistic assumption which is not found in case of indifference curve analysis. The rate at which one commodity is exchanged with other so that the levels of satisfaction remains constant.
Indifference curve technique is an improvement over the utility analysis propounded by Prof. As one moves along a straight-line indifference curve of perfect substitutes, marginal rate of substitution of one good for another remains constant. If we move from A to A 2 the price of Y commodity decreases while reverse is the case. Another characteristic of the indifference curve is that hire the indifference curve higher will be the level of satisfaction. Schaum's Outline of Theory and Problems of Managerial Economics. Indifference curve analysis explains the demand analysis without assuming the marginal utility of money as constant and it is based on multi-commodity model which is more practical and realistic. Thus, budget line or price line shows the various combinations of two commodities that can be purchased by the consumer with his given income.
The line running through the equilibrium point is known as the income-consumption curve, which illustrates the income effects on consumers equilibrium. Perfect complementary goods are used in a certain fixed ratio. Assumptions of the Indifference Curves 3. When all the curves of different levels of satisfaction are shown on a diagram we will get indifference map. Meaning of Indifference Curve : When a consumer consumes various goods and services, then there are some combinations, which give him exactly the same total satisfaction.
The curves are convex to the origin, describing the negative. The of the function is a set of. With the increase in the consumption of X commodity he has to sacrifice y commodity. The greater the fall in marginal rate of substitution, the greater the convexity of the indifference curve. Hence the consumer must prefer Q to S. It means, points B and C should also give the same level of satisfaction. As price rises for a fixed money income, the consumer seeks the less expensive substitute at a lower indifference curve.
The theory can be derived from ' theory, which posits that individuals can always rank any consumption bundles by order of preference. Hence, we can say that same level of satisfaction is possible only when an indifference curve slopes downward to the right. The indifference curve is drawn to predict the animal's behavior at various levels of risk and food availability. If indifference curves were concave or straight lines, the consumer would succumb to monomania, that is, he would buy and consume only one good. However, the assumptions of consumer preference theory do not guarantee that the demand curve will have a negative slope. Rational Consumer: The consumer is assumed to behave in a rational manner, i.