Preferences and Indifference Curves

The substitution and income effects of a wage decrease would reverse these directions. Petunia is working at a job that pays $12 per hour but she gets a raise to $20 per hour. After family responsibilities and sleep, she has 80 hours per week available for work or leisure.

Key Properties of Indifference Curves

We can now attach prices to goods, and a budget to the consumer to see how they are related, and then derive equilibrium,a price consumption line, and then a demand curve. For example, (and assuming an individual likes burgers and apples), over a one week period an individual may be indifferent tocombinations of four burgers and seven apples, and to three burgers and eleven apples. If asked to sacrifice one additional burger,from three to two, the individual would only be indifferent to a combination with only two burgers so long as he or she could consume sixteen apples. A graph of all the combinations of bundles that a consumer prefers equally. To simplify the concept of indifference curve and to properly analyse the consumer’s demand of two different commodities, the various assumptions are made. The resulting formula for y gives the relationship between goods x and y along the indifference curve for a specific utility level k.

1. If two goods are complementary, they are required in fixed proportions to attain the given level of satisfaction.
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.
3. If one of the goods is an inferior good, the response to a higher level of income will be to purchase less of it.
4. Combinations of two goods on the curve provide Jack with the same level of satisfaction (represented by points A, B, C, D in the image).
5. However it’s a little harder to determine all the time what the preference relationship between the two bundles is.
6. This book uses the Creative Commons Attribution License and you must attribute OpenStax.
7. Therefore, no product quantity can be zero, which means the line cannot cut on the axes.

How are countries credit rated?

This means that as the amount of rice (X) is increased by equal amounts, that of beans (Y) diminishes to smaller amounts. The Indifference Curve IC thus is a locus of different combinations of two goods that yield the same level of satisfaction. If the goods are perfect substitutes for each other, the indifference curve will be a straight line sloping downward.

1. Conversely, a lower price for a good will cause the opportunity set to shift to the right, so that it is tangent to a higher indifference curve representing an increased level of utility.
2. To build a model that can predict choices when variables change, we need to make some assumptions about the preferences that drive consumer choices.
3. Indifference curve analysis is a purely technological model which cannot be used to model consumer behaviour.
4. 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.
5. As we will see in this chapter, there are other types of preferences that are common as well, and we will continue to study both the standard type and the other types as we progress through the material.

Indifference Curve always slopes downwards from left to right

One of the distinctive properties of the indifference curves states that they never cut across each other. This is because each indifference curve provides a particular level of satisfaction or utility to the consumer. The substitution effect tells how Quentin would have altered his consumption because the lower rate of return makes future consumption relatively more expensive and present consumption relatively cheaper. The movement from the original choice A to point C shows how Quentin substitutes toward more present consumption and less future consumption in response to the lower interest rate, with no change in utility. The substitution arrows on the horizontal and vertical axes of Figure B6 show the direction of the substitution effect motivation.

Imagine an American who does not speak Hindi entering an Indian restaurant where the menu is entirely in Hindi. Without the aid of translation, the customer cannot act as economic theory would predict. It is the slope of the indifference curve depending upon the willingness of a consumer to sacrifice one commodity for another. Our basic assumption is that the consumer compares such combinations of various quantities of the two commodities that make him indifferent among the combinations. Given the definition of the indifference curve and the assumptions behind it, the indifference curves cannot intersect with each other.

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 what are the properties of indifference curve would cross. Hence, the logic of indifference analysis is that indifference curves cannot cross. Over a range of incomes numerous indifference curves would exist – in theory, an infinite number.The principle of logical choice would clearly suggest that these indifference curves cannot cross each other.

If you had reasonably equal amounts of both, you’d be willing to trade one for the other, but at closer to one-to-one ratios. Notice that if we graph this, we naturally get bowed-in indifference curves, as shown in figure 1.4. Preference for variety implies that indifference curves are bowed in.

By altering the budget (or income) we can construct anincome-consumption line, and derive an Engel curve, as shown. Firstly, we start by assuming that an individual’s budget is fixed – later, we can change the budget to see its effect on spending. Indifference curves indicate complete replaceability, which means they should not overlap in demand, but be parallel. A good that makes a consumer just as well off as a fixed amount of another good, i.e., Morton and Diamond Crystal are brands of table salt.

The slope of the budget constraint in a labor-leisure diagram is determined by the wage rate. The “s” arrows on the horizontal and vertical axes of Figure B5 show the substitution effect on leisure and on income. An indifference curve is drawn on a budget constraint diagram that shows the tradeoffs between two goods.

Some economists argue that every choice indicates a preference for one combination over another rather than indifference to the outcome. This would make a given indifference curve useless for any analysis. Many core principles of microeconomics appear in indifference curve analysis, including individual choice, marginal utility theory, income, substitution effects, and the subjective theory of value. An indifference curve consists of different combinations of two goods giving the same satisfaction level to a consumer. It means that every point on an indifference curve gives the same satisfaction to the consumer. Also, an indifference map consists of different indifference curves with different satisfaction levels in each curve.