The Uses or Application of Indifference Curve Analysis | Economics
- (1) The Problem of Exchange: With the help of indifference curve technique the problem of exchange between two...
- (2) Effects of Subsidy on Consumers: The indifference curve technique can be used to measure the effects of government...
- (3) The Problem of Rationing: The indifference curve technique is used...
How to draw an indifference curve?
If we then draw a line that separates the plus from the minus signs, we will obtain the indifference curve shown in the above figure. The individual will be indifferent between all combinations of X and Y indicated by the curve and will prefer all combinations above the indifference curve to any combination on the curve.
How to find indifference curve?
- Buy less of product X and more of product Y.
- She is already maximizing her happiness and should not change her consumption bundle.
- Buy more of product X and less of product Y.
What causes a shift in indifference curve?
Properties of Indifference Curves
- Indifference curves never cross. If they could cross, it would create large amounts of ambiguity as to what the true utility is.
- The farther out an indifference curve lies, the farther it is from the origin, and the higher the level of utility it indicates. ...
- Indifference curves slope downwards. ...
- Indifference curves assume a convex shape. ...
What is the definition of indifference curve?
Indifference curve refers to the graphical representation of various alternative combinations or bundles of two goods among which the consumer is indifferent. Alternatively, indifference curve is a locus of points that shows such combinations of two commodities which give the consumer same or equal level of satisfaction.
What is the purpose of the indifference curve?
The indifference curve technique can be used to measure the effects of government subsidy on low income groups. We take a situation when the subsidy is not paid in money but the consumers are supplied cereals at concessional rates, the price-difference being paid by the government.
What is an indifferent curve?
The indifferent curve analysis is used in measuring the cost of living or standard of living in terms of index numbers. We come to know with the help of index numbers whether the consumer is better off or worse off by comparing two time periods when the income of the consumer and prices of two goods change.
Why is the indifference curve used?
The technique of indifference curves has been used not only to explain consumer’s behaviour and demand but also to analyse and explain several other economic problems. In other words, besides analysing consumer’s demand, indifference curves have several other applications. Thus, indifference curves have been used to explain the concept ...
What is indirect tax?
On the other hand, an indirect tax is one which can be passed on or shifted to others by raising the prices of the goods.
What is an indifference curve?
Summary. An indifference curve is a contour line where utility remains constant across all points on the line. The four properties of indifference curves are: (1) indifference curves can never cross, (2) the farther out an indifference curve lies, the higher the utility it indicates, (3) indifference curves always slope downwards, ...
What happens when you go down the indifference curve?
As you go down the curve of an indifference curve, the curve becomes flatter as one good is substituted for the other. It is the individual’s marginal rate of substitution, which is defined as the more an individual consumes good A in proportion to good B, the less of good B the individual will substitute for another unit of good A.
What is the term for a good that satisfies all four properties of indifference curves
If a good satisfies all four properties of indifference curves, the goods are referred to as ordinary goods . They can be summarized as the consumer requires more of one good to compensate for less consumption of another good, and the consumer experiences a diminishing marginal rate of substitution when deciding between two goods.
How can an individual increase consumption in one good without gaining utility?
The only way an individual can increase consumption in one good without gaining utility is to consume another good and generate the same amount of utility. Therefore, the slope is downwards sloping. Indifference curves assume a convex shape.
What is marginal tendency to consume?
Marginal Propensity to Consume The Marginal Propensity to Consume (MPC) refers to how sensitive consumption in a given economy is to unitized changes in income levels.
Do indifference curves cross?
Indifference curves never cross. If they could cross, it would create large amounts of ambiguity as to what the true utility is. The farther out an indifference curve lies, the farther it is from the origin, and the higher the level of utility it indicates. As illustrated above on the indifference curve map, the farther out from the origin, ...
