Different indifference curves can be obtained by changing the value of k. Similarly, at point E, he buys the what are the properties of indifference curve OE quantity of rice and no beans. Similarly, the combinations showed by points B and E on indifference curve IC1 give equal satisfaction to the consumer. If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. It follows that the combination F will be equivalent to E in terms of satisfaction. We measure the quantity of rice along the X-axis and beans along the Y-axis.
What is Indifference Curve Analysis?
Choice theory formally represents consumers by a preference relation, and use this representation to derive indifference curves showing combinations of equal preference to the consumer. The indifference curve slopes down from left to right on the graph. The curve slopes downward as the consumption of commodity A increases in exchange for commodity B.
Completeness of choices
Nisha is consuming two goods Chocolate and Ice-Cream, and is willing to consume different combinations of these goods to gain an equal level of satisfaction with each combination. A process of analyzing a simple two-dimensional graph representing two goods, one on the x-axis and the other on the y-axis is known as an Indifference Curve Analysis. If the graph of the combination of goods is on the line or curve, it means that the consumer gains the same satisfaction level or utility from the goods and thus, does not have any preference for the goods. For example, a child may gain the same satisfaction level from one ice cream and two chocolates, or three ice creams and one chocolate. It makes sense to convert the Y axis to ‘all other goods’ so that a single good can be placed on the X axis. For example, we could bundle all the other goods an individual could purchase, keep their prices and budget constant, and simply vary the price of burgers (or any single product).
Higher Indifference Curves represent a higher level of satisfaction
In Figure B1, indifference curve Ul can be thought of as a “low” level of utility, while Um is a “medium” level of utility and Uh is a “high” level of utility. All of the choices on indifference curve Uh are preferred to all of the choices on indifference curve Um, which in turn are preferred to all of the choices on Ul. An indifference curve represents the different combinations of goods that an individual considers equally desirable or preferable, reflecting their preferences and the level of satisfaction they derive from consuming those goods. In cases where two goods are perfect substitutes, the indifference curves will be straight lines with a constant slope. This is because the consumer is willing to trade one good for the other at a constant rate, without any preference for diversification. For example, two brands of bottled water that have identical taste and quality would be considered perfect substitutes.
Linear Isoquants: Understanding Constant Input Substitution Rates
- If the amount substituted is imperfect, the marginal rate of substitution will be constant.
- This assumption states that consumers are consistent in how they make their choices.
- Since latexA/latex can’t be preferred to latexB/latex and latexB/latex preferred to latexA/latex at the same time, this is a violation of our assumptions of transitivity and more is better.
- It represents more of both goods than bundle latexC/latex, which lies on the other indifference curve.
- This combination would result in a coordinate/combination inside and to the left of the original indifference curve, and if the sequence is completed, the two curves would cross.
- Greater the curvature of the indifference curve, lesser will be the degree of substitutability.
What the two-goods restriction does so well is to help us see the trade-offs in consuming more of one good and less of another. He has to decide now how many packets of each he must buy to achieve the maximum utility level. This book uses the Creative Commons Attribution License and you must attribute OpenStax.
Think about indifference curves that slope upward, as in figure 1.2. In this case, we have two bundles on the same indifference curve, latexA/latex and latexB/latex, but latexB/latex has more of both burritos and sandwiches than does latexA/latex. In summary, the formula for the indifference curve depends on the specific utility function used to represent a consumer’s preferences. By using a mathematical formula to represent the indifference curve, economists can better understand and analyze consumer decision-making and the trade-offs between different goods.
Clearly, the assumption that more is preferred to less only relates to a beneficial ‘good’, rather than a harmful one. Although the marginal utility derived from increased consumption may fall, the assumption still holds that more of something good ispreferred to less of it. A consumer that conforms to the “well-behaved” conditions of consumer preferences, and thus the indifference curve for this consumer’s choice problem behaves as expected. We can label one axis of the indifference curve map “miles driven” and the other “money for other consumption.” Doing so illustrates how confining ourselves to only two dimensions is really not that confining at all. By considering the other axis as money for all other purchases, we are really looking at the general trade-off between one particular consumption good and everything else that a consumer could possibly consume.
- From this discussion and graph, it should be clear that the latexMRS/latex is the same as the slope of the indifference curve at any given point along it.
- That is, one unit of one good is just as good as one unit of another good.
- Preference for variety implies that indifference curves are bowed in.
- It means that every point on an indifference curve gives the same satisfaction to the consumer.
As shown in Figure B5, the highest level of utility for Petunia, on her original budget constraint, is at choice A, where it is tangent to the lower indifference curve (Ul). Point A has 30 hours of leisure and thus 50 hours per week of work, with income of $600 per week (that is, 50 hours of work at $12 per hour). Petunia then gets a raise to $20 per hour, which shifts her budget constraint to the right. Her new utility-maximizing choice occurs where the new budget constraint is tangent to the higher indifference curve Uh. At B, Petunia has 40 hours of leisure per week and works 40 hours, with income of $800 per week (that is, 40 hours of work at $20 per hour). Higher indifference curves represent a greater level of utility than lower ones.
It, thus, maintains the same level of consumer satisfaction in all combinations. A higher indifference curve represents a higher level of satisfaction, or we can say that an indifference curve to the right of another gives more satisfaction. This property of the indifference curve is based on the assumption of monotonic preference. Monotonic Preference means that a consumer will always prefer a larger bundle, as it gives him/her a higher satisfaction level. In other words, as a consumer prefers more goods, and a higher indifference curve will give a higher satisfaction level.
In other words, the consumer would be just as happy consuming any of them. Representing preferences graphically is a great way to understand both preferences and how the consumer choice model works—so it is worth mastering them early in your study of microeconomics. For Quentin’s personal preferences, the substitution effect is stronger so that, overall, he reacts to the lower rate of return with more present consumption and less savings at choice B.
An indifference schedule is used to plot the different combinations of two goods on a graph for the formation of an indifference curve. The most important thing to know is that if preferences are both strictly monotonic and strictly convex, then it turns out that all indifference curves will be downward-sloping curves that are “bowed in” toward the origin. A basic indifference curve is formed from a series of combinations of two goods or baskets of goods that provide the consumer with the same utility – in other words, they are indifferent to them. Putting these effects together, Petunia responds to the higher wage by moving from choice A to choice B. Her movement from A to B also involves choosing more leisure because, according to Petunia’s preferences, the income effect that encourages choosing more leisure is stronger than the substitution effect that encourages choosing less leisure.
