What are indifference curves?
This appendix presents an alternative approach to describing personal preferences, called indifference curves, which avoids any need for using numbers to measure utility.
What can cause a shift in the demand curve?
As style and the desire to consume certain items increases or decreases, it will cause a shift in the demand curve. For example, drinks that have a lot of sugar became less desirable in recent years. That means the taste and the preference of consumers have changed.
Are substitution and income effects the same on indifference curves?
The answers you get about the direction and relative sizes of the substitution and income effects, however, should be the same. An indifference curve is drawn on a budget constraint diagram that shows the tradeoffs between two goods. All points along a single indifference curve provide the same level of utility.
Why does the slope of indifference curve change with marginal utility?
In short, the slope of the indifference curve changes because the marginal rate of substitution—that is, the quantity of one good that would be traded for the other good to keep utility constant—also changes, as a result of diminishing marginal utility of both goods.
What affects indifference curve?
Indifference Curve Analysis As income increases, an individual will typically shift their consumption level because they can afford more commodities, with the result that they will end up on an indifference curve that is farther from the origin—hence better off.
What happens when you move down an indifference curve?
Most indifference curves are usually convex because as you consume more of one good you will consume less of the other. So, MRS will decrease as one moves down the indifference curve. This is known as the law of diminishing marginal rate of substitution.
What causes the indifference curves to be straight line?
Yes, the indifference curve can be a straight line if both the goods are perfect substitutes that is both goods provide the same level of satisfaction...
Why do indifference curves fall left to right?
1) Indifference Curves are Negatively Sloped: The indifference curves must slope downward from left to right. As the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction.
What happens to the MRS as you move along a convex indifference curve?
The MRS diminishes along a convex indifference curve. This occurs because as you move down along the indifference curve, you are willing to give up less and less of the good on the vertical axis in exchange for one more unit of the good on the horizontal axis.
What can cause an upward shift in the budget line?
The budget line will shift when there is:A change in the prices of one or both products with nominal income (budget) remaining the same.A change in the level of nominal income with the relative prices of the two products remaining the same.
Why indifference curve is negatively sloped?
An indifference curve always slopes downward from left to right, i.e. it has a negative slope. This is so because if a consumer wants to have more units of one commodity; he will have to reduce the number of units of the other commodity, due to his limited income.
What are the four properties of indifference curves?
The 4 Properties of Indifference CurvesHigher indifference curves are preferred to lower ones;Indifference curves are downward sloping;Indifference curves do not cross;Indifference curves are bowed inwards;
Why is the indifference curve convex or bowed inward?
Because of the law of diminishing marginal rate of substitution, indifference curves bow in toward the origin. Higher indifference curves represent higher levels of utility.
Why is an indifference curve downward sloping from left to right and convex?
1 Answer. (i) Indifference Curve Slopes Downwards : because in order to consume more units of X good the consumer must give up some quantity of Y good, so that consumer remains on the same level of satisfaction at each of an indifference curve.
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 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 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.
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, ...
Why are indifference curves criticized?
Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior. For example, consumer preferences might change between two different points in time rendering specific indifference curves practically useless.
What is an indifference curve?
Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget. Economists have adopted the principles of indifference curves in the study of welfare economics .
Why is the consumer indifferent?
Along the indifference curve, the consumer is indifferent between any of the combinations of goods represented by points on the curve because the combination of goods on an indifference curve provide the same level of utility to the consumer. For example, a young boy might be indifferent between possessing two comic books and one toy truck, ...
Do indifference curves intersect?
Indifference curves operate under many assumptions; for example, typically each indifference curve is convex to the origin, and no two indifference curves ever intersect. Consumers are always assumed to be more satisfied when achieving bundles of goods on indifference curves that are farther from the origin.
Why does the slope of the indifference curve change?
In short, the slope of the indifference curve changes because the marginal rate of substitution—that is, the quantity of one good that would be traded for the other good to keep utility constant—also changes, as a result of diminishing marginal utility of both goods.
What is the purpose of the indifference curve?
Economists use a vocabulary of maximizing utility to describe people’s preferences. In Consumer Choices, the level of utility that a person receives is described in numerical terms. This appendix presents an alternative approach to describing personal preferences, called indifference curves, which avoids any need for using numbers to measure utility. By setting aside the assumption of putting a numerical valuation on utility—an assumption that many students and economists find uncomfortably unrealistic—the indifference curve framework helps to clarify the logic of the underlying model.
What is the difference between a budget constraint diagram and an indifference curve?
An indifference curve is drawn on a budget constraint diagram that shows the tradeoffs between two goods. All points along a single indifference curve provide the same level of utility. Higher indifference curves represent higher levels of utility. Indifference curves slope downward because, if utility is to remain the same at all points along the curve, a reduction in the quantity of the good on the vertical axis must be counterbalanced by an increase in the quantity of the good on the horizontal axis (or vice versa). Indifference curves are steeper on the far left and flatter on the far right, because of diminishing marginal utility.
What happens when an indifference curve crosses the budget line?
When one indifference curve crosses the budget line in two places, however, there will be another, higher, attainable indifference curve sitting above it that touches the budget line at only one point of tangency.
What does the downward slope of the indifference curve mean?
The downward slope of the indifference curve means that Lilly must trade off less of one good to get more of the other, while holding utility constant. For example, points A and B sit on the same indifference curve Um, which means that they provide Lilly with the same level of utility.
How many points are there on the indifference curve?
The indifference curve Um has four points labeled on it: A, B, C, and D. Since an indifference curve represents a set of choices that have the same level of utility, Lilly must receive an equal amount of utility, judged according to her personal preferences, from two books and 120 doughnuts (point A), from three books and 84 doughnuts (point B) from 11 books and 40 doughnuts (point C) or from 12 books and 35 doughnuts (point D). She would also receive the same utility from any of the unlabeled intermediate points along this indifference curve.
How does a higher price affect the budget constraint?
A higher price for a good will cause the budget constraint to shift to the left, so that it is tangent to a lower indifference curve representing a reduced level of utility. 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. Exactly how much a change in price will lead to the quantity demanded of each good will depend on personal preferences.
Why does the slope of the indifference curve change?
In short, the slope of the indifference curve changes because the marginal rate of substitution—that is, the quantity of one good that would be traded for the other good to keep utility constant—also changes, as a result of diminishing marginal utility of both goods.
What is the purpose of the indifference curve?
Economists use a vocabulary of maximizing utility to describe people’s preferences. In Consumer Choices, the level of utility that a person receives is described in numerical terms. This appendix presents an alternative approach to describing personal preferences, called indifference curves, which avoids any need for using numbers to measure utility. By setting aside the assumption of putting a numerical valuation on utility—an assumption that many students and economists find uncomfortably unrealistic—the indifference curve framework helps to clarify the logic of the underlying model.
What is the difference between a budget constraint diagram and an indifference curve?
An indifference curve is drawn on a budget constraint diagram that shows the tradeoffs between two goods. All points along a single indifference curve provide the same level of utility. Higher indifference curves represent higher levels of utility. Indifference curves slope downward because, if utility is to remain the same at all points along the curve, a reduction in the quantity of the good on the vertical axis must be counterbalanced by an increase in the quantity of the good on the horizontal axis (or vice versa). Indifference curves are steeper on the far left and flatter on the far right, because of diminishing marginal utility.
What does a reduction in income mean in a budget constraint?
A reduction in income will cause the budget constraint to shift to the left, which will cause it to be tangent to a lower indifference curve, representing a reduced level of utility.
What happens when an indifference curve crosses the budget line?
When one indifference curve crosses the budget line in two places, however, there will be another, higher, attainable indifference curve sitting above it that touches the budget line at only one point of tangency.
What does the downward slope of the indifference curve mean?
The downward slope of the indifference curve means that Lilly must trade off less of one good to get more of the other, while holding utility constant. For example, points A and B sit on the same indifference curve Um, which means that they provide Lilly with the same level of utility.
How many points are there on the indifference curve?
The indifference curve Um has four points labeled on it: A, B, C, and D. Since an indifference curve represents a set of choices that have the same level of utility, Lilly must receive an equal amount of utility, judged according to her personal preferences, from two books and 120 doughnuts (point A), from three books and 84 doughnuts (point B) from 11 books and 40 doughnuts (point C) or from 12 books and 35 doughnuts (point D). She would also receive the same utility from any of the unlabeled intermediate points along this indifference curve.
Understanding Indifference Curve
An indifference curve is a downward sloping convex line connecting the quantity of one good consumed with the amount of another good consumed. Irish-born British economist Francis Ysidro Edgeworth first proposed this two-dimensional graph, also known as the iso-utility curve.
Indifference Curve Properties
Downward Slope: In a curve, when the consumption of one commodity increases, the consumption of another decreases for any combination. Since it indicates a positive marginal rate of substitution (MRS), ensuring the same level of satisfaction, it leads to a negative or downward slope.
How To Analyze Indifference Curve?
An indifference curve reveals many combinations of two goods a consumer prefers to consume. In its analysis, core principles of microeconomics are involved. It comprises individual choices, marginal utility Marginal Utility A customer's marginal utility is the satisfaction or benefit derived from one additional unit of product consumed.
Indifference Curve Assumptions
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
Examples
Jack has 1 unit of cloth and 8 units of the book. He decides to exchange 4 units of books for an additional piece of cloth. The following situations may occur:
Indifference Curve and Budget Line
A higher indifference curve shows a higher level of satisfaction. Hence, a consumer prefers to reach the tallest line to attain a higher utility level. But there are some budget constraints due to the low income of the consumer.
Recommended Articles
This has been a guide to What is Indifference Curve and its Definition. Here we discuss the properties of the indifference curve and how to analyze it, along with examples and assumptions. You may also have a look at the following articles to learn more –
Why is indifference curve criticized?
Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior. One noteworthy criticism is that indifference is conceptually incompatible with economic activity. Every action necessarily gives a practical exhibition preference, but not indifference. Otherwise, no action would take place.
What is standard indifference curve?
Standard indifference curve analysis operates on a simple two-dimensional graph. Each fixed reference line represents one type of economic good. Along the curve or the line, the consumer has no preference for either combination of goods.
