Indifference Curve Analysis
Made By Team D
PRAGATI SHANDILYA
SHUBHAM KUMAR
SHIVAM GOSWAMI
SUSHANT SINHA
ADARSH MISHRA
History
The concept of indifference curve was first developed by
British economist FRANSIS YSIDRO EDGEWORTH in
1881.
And the VIDERO PARETO made made extensive use of
IC in early 20th century.
Indifference curve also called Iso-utility curve and
equal utility curve.
WHAT IS INDIFFERENCE
CURVE
An Indifference Curve is a graph Each point in indifference curve
that shows different combinations indicates that a consumer is
of two goods that give a consumer indifferent between the two and all
the same level of satisfaction and points give him the same utility.
utility.
It is a tool used in economics to
represent consumer preferences
and demand patterns.
Combination Good A Good B
20
A 20 10
12 B 12 30
10 30
EXPLANATION OF INDIFFERENCE
CURVE
The diagram shows the U indifference
curve showing bundles of goods A and
B. To the consumer, bundle A and B
20
are the same as both of them give
equal satisfaction.
10
In other words, point A gives as much
utility as point B to the individual. The 5
10
consumer will be satisfied at any point
along the curve assuming that other
things are constant.
Indifference schedule
A tabular representation of the combinations of two commodities which yield
equal satisfaction or among which consumer is indifferent is called
indifference schedule.
In other words, an Indifference Schedule is a table that shows
different combinations of two goods that give a person the same
amount of happiness or satisfaction. It means the person doesn't
prefer one combination over another; they feel the same about
each one.
Combination Quantity of Quantity of
Bananas ( Qx) Mangoes ( Qy)
A 1 15
B 2 12
C 3 10
D 4 9
Assumptions of Indifference Curve
The indifference curve based on some assumption.
These assumption are:
Rational Consumer - It means that consumer
who wants maximum satisfaction out of his/her
limited income.
Two Commodities - It is assumed that the
consumer has fixed amount of money, all of
which is to be spent only on two goods while
price of both goods are same.
Non Satiety - Satiety means full satisfaction. Indifference
curve theory assume that the consumer has not yet reached the
point of satiety. It implies that the consumer still has the will to
consume more of both of goods.
Ordinal Utility - According to this theory,utility is a
physcological phenamenon and thus it is unquantifiable.
However, the theory assumes that a consumer can express
utility in terms of rank. The consumer can do it by the basis
of satisfaction yielded from each combination of goods.
Diminishing Marginal Rate of Substitution -
Marginal rate of substitution may be define as the amount
of commodity that a consumer is willing to trade of for
another commodities, as long as the second commodity
provides the same level of utility as the first one.
Importance of Indifference Curve
Consumer Behaviour : Indifference curves help analyze
consumer behavior, preferences, and decision-making
processes.
Demand Theory : Indifference curves are used to derive
demand curves, which show the relationship between the price
of a good and the quantity demanded.
Resource Allocation : Indifference curves help in allocating
resources efficiently, as they show the optimal combination of
goods that provide the maximum satisfaction.
Welfare Economics : Indifference curves are used to analyze
the welfare implications of different economic policies and
changes in income or prices.
Limitations of Indifference Curve
Ignores Dynamic Changes : Indifference curves are
static and do not account for changes in consumer
preferences or income over time.
Difficult to Measure : Indifference curves are difficult to
measure and estimate, as they require accurate data on
consumer preferences and behavior.
Limited to Two Goods : Indifference curves are typically
used to analyze the trade-off between two goods, which may
not accurately represent real-world consumer choices.
Ignores External Factors : Indifference curves do not
account for external factors that may influence consumer
behavior, such as advertising or social norms.
Properties of Indifference Curve
There are four basic properties of an indifference curve. These are;
1. Indifference curve slope downward to right -
An indifferent curve can neither be
horizontal line nor an upward sloping curve.
This is very important when a consumer
want to have more of a commodity.
He/ she will have to give up some other
commodity, given that the consumer
remains on the same level of utility at
constant income. As a result, the
indifference curve slopes downward from
left to right.
2. Indifference curve is convex to the origin -
Indifference curves are convex to the origin.
This means that as the consumer moves
downward and to the right along the curve.
When you start drinking more coffee and less
tea, the change in the quantities makes the curve
almost flat. This happens because of the law of
substitution, which says that the rarer a product
is, the more valuable it becomes compared to
something that's easy to get. So, as coffee
becomes scarcer, its value goes up compared
to tea, which is more abundant.
3. Indifference curve can not intersect each other:-
Indifference curves do not cross each other.
If they did cross, it would mean that two
different combinations of goods, which
the consumer does not prefer equally,
would appear to be equally preferred.
This would be confusing and incorrect.
4. Higher indifference curve represents higher level of
satisfaction -
When an indifference curve is higher on
the graph, it means that the consumer
gets more satisfaction from the
combinations of goods on that curve
compared to a lower one.
THANK YOU
