What are characteristics of an indifference curve?
- A higher curve means a higher level of satisfaction, in contrast to a lower curve.
- It is generally known that two Indifference Curves never intersect each other. They may not always be parallel to each other as well.
- An Indifference Curve never touches the axis.
What information is contained in an indifference curve?
The indifference curve approach is based upon the following assumptions:
- Non-Satiety: A rational person will prefer a larger quantity of a good than a smaller amount of it. ...
- Transitivity: The consumer is supposed to be consistent about his tastes and preference. ...
- Diminishing Marginal Substitutability:
Why are indifference curves never intersect?
Indifference curves never intersect, because by definition, all points on the same curve represent equivalent satisfaction. The red data point must have the same utility as the place where the curves cross. The green data point will also have the same utility as the place where the indifference curves intersect.
What is the importance of an indifference curve?
What is the importance of indifference 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 ...
What is indifference curve explain it's properties?
(##include msid=4006719,type=11 ##) Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.
What are the 5 properties of indifference curve?
Characteristics of Indifference Curves (with diagram)Indifference curves slop downward to the right.Every indifference curve to the right represents a higher level of satisfaction.Indifference curves cannot intersect each other.Indifference curve will not touch the axis.Indifference curves are convex to the origin.
What are the three properties of indifference curve?
In particular, no matter what the relationship between the goods may be, all indifference curves are negatively sloped and convex to the origin in the effective region. The curves become parallel to one or other of the axes at the points at which they cross the boundaries of the effective region.
What is indifference curve with examples?
Two commodities are perfect substitutes for each other – In this case, the indifference curve is a straight line, where MRS is constant. Two goods are perfect complementary goods – An example of such goods would be gasoline and water in a car. In such cases, the IC will be L-shaped and convex to the origin.
What are the different types of indifference curves?
There are two types of indifference curves: perfect complements indifference curves and perfect substitutes indifference curves.
What is indifference curve formula?
The equation of a typical indifference curve is: U(t, y)=c. where the constant c stands for the utility level achieved on the curve. Different values of c correspond to different indifference curves: if we increase c we obtain a new indifference curve that is above and to the right of the old one.
What is indifference curve in economics PDF?
yield Equal Satisfaction to the Consumer. - Leftwitch. • An Indifference Curve is a Combination of. Goods, each of which yield the Same. Level of Total Utility to which the Consumer is Indifferent.
What is the importance of indifference curve?
The indifference curve technique is used to explain the problem arising from various systems of rationing. Since we are assuming that subsidy paid by the Government is half the market price of food, the consumer would pay half the market price.
Which one is not property of indifference curves?
Indifference curves do not tend to be parallel to each other. Was this answer helpful?
What is the importance of indifference curve?
The indifference curve technique is used to explain the problem arising from various systems of rationing. Since we are assuming that subsidy paid by the Government is half the market price of food, the consumer would pay half the market price.
What are the assumptions of indifference curve?
Indifference Curve Assumptions The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice. The consumer is expected to buy any of the two commodities in a combination. Consumers can rank a combination of commodities based on their satisfaction levels.
What are the properties of budget line?
Some of the properties of the budget line are as follows: Negative slope: If the line is downward, it shows a reverse correlation between the two products. Straight line: It indicates a continuous market rate of exchange in individual combinations.
What is Indifference Curve?
An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility.
Is IC convex or convex?
IC is strictly Convex to origin i.e. MRSxy is always diminishing. Reason: Due to the law of diminishing marginal utility a consumer is always willing to sacrifice lesser units of a commodity for every additional unit of another good. (c) HIGHER INDIFFERENCE CURVE REPRESENTS. HIGHER LEVEL OF SATISFACTION.
Do all products resting in the indifferent curve give the same satisfaction?
Here, we understand that all three products resting in the indifferent curve give him the same satisfaction. However, his preference for those combined products can be arranged in the order of preference.
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 Defines the Convexity of Indifference Curves?
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 tangency condition between the indifference curve and the budget line?
The tangency condition between the indifference curve and the budget line indicates the optimal consumption bundle when indifference curves exhibit typical convexity.
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.
What is yield curve?
Yield Curve The Yield Curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if he lends his money for a given period of time. The graph displays a bond's yield on the vertical axis and the time to maturity across the horizontal axis.
Do inference curves cross?
Indifference curves never cross. If they could cross, it would create large amounts of ambiguity as to what the true utility is.
What is Indifference Curve?
Indifference curve can be defined as the locus of points each representing a different combination of two good, which yield the same level of utility and satisfaction to a consumer.
Why is the indifference curve negative?
The reason for the negative slope is that as a consumer increases the consumption of commodity X, he/ she sacrifices some units of commodity Y in order to maintain the same level of satisfaction.
Why is the consumer indifferent to any combination of two commodities?
This is because an individual consumes a variety of goods over time and realises that one good can be substituted with another without compromising on the satisfaction level.
What is the assumption that a consumer always prefers a large number of a good to smaller amount of that?
It is assumed in the analysis that a consumer always prefers a large number of a good to smaller amount of that good provided that the amount of other goods at his disposal remains unchanged. It implies that the consumer never reaches at satiety point. This assumption is known as non-satiety assumption.
What is the locus of the points representing pairs of quantities between which the individual is indifferent?
Smith has defined, “It is a locus of the points representing pairs of quantities between which the individual is indifferent, so it is termed as indifference curve.”
Who defined the locus of all commodity combinations from which a consumer derives the same level of satisfaction forms an in?
Prof. Henderson and Prof. Quandt have defined, “The locus of all commodity combinations from which a consumer derives the same level of satisfaction forms an indifference curve.”
Is IC convex or curved?
ICs are curved inwards; thus they are convex to the origin. This implies that as the consumer continues to substitute commodity X for commodity Y, MRS of X for Y diminishes along the IC.
What is an indifference curve?
Indifference curves are graphical representations of various combinations of two commodities which an individual considers equally valuable . They are used to analyze consumer preferences and a number of other concepts. There are four important properties of indifference curves that describe most of them: (1) They are downward sloping, ...
Why are indifference curves important?
Indifference curves are widely used in microeconomics to analyze consumer preferences, the effects of subsidies and taxes, and a few other concepts. Although they come in many shapes and sizes, most of them share a few important properties. Thus, we will look at the four most important properties of indifference curves in more detail below.
How to tell if an indifference curve is negative?
The slope of the curve shows the rate of substitution between two goods, i.e. the rate at which an individual is willing to give up some quantity of good A to get more of good B. If we assume that the individual likes both goods, the quantity of good B has to increase as the quantity of good A decreases, to keep the overall level of satisfaction the same. Because both axes each represent one of the two goods, this relationship results in a downward sloping curve. This becomes pretty obvious if we look at the indifference map below.
What would happen if two indifference curves were to cross?
Therefore, if two indifference curves were to cross, they would both have to provide the consumer with the same level of total satisfaction, because the exact point where they intersect (i.e., point A) is on both curves. Thus, all other combinations on both curves would have to provide the same level of satisfaction as well.
Why do consumers prefer higher indifference curves?
Consumers will always prefer a higher indifference curve to a lower one. This is due to the basic economic assumption that “ more is always better “ .
Why does the quantity of good B increase as the quantity of good A decrease?
If we assume that the individual likes both goods, the quantity of good B has to increase as the quantity of good A decreases, to keep the overall level of satisfaction the same. Because both axes each represent one of the two goods, this relationship results in a downward sloping curve.
Can indifference curves be convex?
Therefore both curves can’t provide the same level of satisfaction, which means they can never intersect. 4. Indifference Curves are convex (i.e., bowed inward) In most cases, indifference curves are bowed inward. This has to do with the marginal rate of substitution (MRS). We know that the marginal utility of consuming a good decreases as its ...
What is Indifference Curve?
Indifference curves are used to show the consumer’s preferences and demand patterns for individual consumers over different commodities.
What does it mean when a graph shows an indifference curve?
For instance, in the graph showing the indifference curve is convex to the origin. It signifies that the marginal rate of substitution of rice for wheat is declining. It means as the consumer gets more and more units of rice, he parts with fewer units of wheat. This situation conforms to real life. Consequently, an indifference curve is convex ...
What is the IC curve in a fig?
IC is the indifference curve. The points A, B, C and D on the IC curve indicate those combinations of rice and wheat which yield equal satisfaction to the consumer. This curve is also known as Iso-utility curve.
What is the collection of indifference curves over different utility levels on the graph?
The collection of indifference curves over different utility levels on the graph is known as the indifference map. It shows the different combinations of two commodities which yield equal satisfaction to the consumer. Different indifference curves are used to indicate lower and higher levels of satisfaction of different combination of two goods.
Why is the slope of the indifference curve negative?
This is because of the assumption that if the consumer decides to have more of one commodity, he must consume less quantity of others. then, only he can get equal satisfaction from their different combinations. For example, in fig, the consumer will get equal satisfaction at all points on the indifference curve. In combination A, the quantity of wheat is more than rice. Similarly, in combination D, the quantity of rice is more than wheat. Consequently, the slope of the indifference curve will invariably be downward sloping negative curve.
What is it called when different indifference curves are shown in a diagram?
In other words, when the different indifference curves or family of indifference curves are shown in a diagram, it is called indifference map.
Does the indifference curve touch the X axis?
It is assumed that the consumer consumes the combination of different quantities of two goods. Hence, the indifference curve never touches the X or Y-axis. If in case, any indifference curve touches the axis, it implies that only one commodity is consumed by the consumer and demand for other commodity is zero. It may touch Y-axis if Y-axis represents money instead of a commodity.
What is the property of an indifference curve?
Another important property of indifference curves is that they are usually convex to the origin. In other words, the indifference curve is relatively flatter in its right-hand portion and relatively steeper in its left-hand portion. This property of indifference curves follows from assumption 3, which is that the marginal rate of substitution ...
What does a convex indifference curve mean?
Only a convex indifference curve can mean a diminishing marginal rate of substitution of X for K If indifference curve was concave to the origin it would imply that the marginal rate of substitution of X for y increased as more and more of X was substituted, for Y.
What is the point of the indifference curve in Fig. 8.5?
In Fig. 8.5 two indifference curves are shown cutting each other at point C. Now take point on indifference curve IC 2 and point B on indifference curve IC 1 vertically below A. Since an indifference curve represents those combinations of two commodities which give equal satisfaction to the consumer the combinations represented by points A and C will give equal satisfaction to the consumer because both lie on the same indifference curve IC 2.
Why are indifference curves parallel?
In case of perfect substitutes, the indifference curves are parallel straight lines because the consumer equally prefers the two goods and is willing to exchange one good for the other at a constant rate.
What does it mean when the indifference curve is downward sloping?
Indifference curve being downward sloping means that when the amount of one good in the combination is increased, the amount of the other good is reduced. This must be so if the level of satisfaction is to remain the same on an indifference curve.
What is the third property of indifference?
Third important property of indifference curves is that they cannot intersect each other In other words only one indifference curve will pass through a point in the indifference map 1 his property can be easily proved by first making the two indifference curves cut each other and then showing the absurdity or self-contradictory result it leads to.
When two goods are perfect substitutes of each other, what is the indifference curve?
As stated above, when two goods are perfect substitutes of each other, the indifference curve is a straight line on which marginal rate of substitution remains constant. The better substitutes the two goods are for each other, the closer the indifference curve approaches to the straight line so that when the two goods are perfect substitutes ...
How many properties are there in an indifference curve?
There are four basic properties of an indifference curve. These properties are
Who invented the indifference curve?
The concept of indifference curve analysis was first propounded by British economist Francis Ysidro Edgeworth and was put into use by Italian economist Vilfredo Pareto during the early 20 th century. However, it was brought into extensive use by economists J.R. Hicks and R.G.D Allen. Hicks and Allen criticized Marshallian cardinal approach ...
What does higher indifference mean?
Higher indifference curve represents higher level of satisfaction. Higher the indifference curves, higher will be the level of satisfaction. This means, any combination of two goods on the higher curve give higher level of satisfaction to the consumer than the combination of goods on the lower curve.
What is the locus of all combinations of two goods that yield the same level of satisfaction?
Indifference curve. An indifference curve is a locus of all combinations of two goods which yield the same level of satisfaction (utility) to the consumers. Since any combination of the two goods on an indifference curve gives equal level of satisfaction, the consumer is indifferent to any combination he consumes.
What is IC in a graph?
In the above diagram, IC is an indifference curve, and A and B are two points which represent combination of goods yielding same level of satisfaction.
Is an indifference curve convex?
As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin.
Can an indifference curve intersect?
Indifference curve cannot intersect each other . Each indifference curve is a representation of particular level of satisfaction. The level of satisfaction of consumer for any given combination of two commodities is same for a consumer throughout the curve. Thus, indifference curves cannot intersect each other.
What are the properties of an indifference curve?
Some of the properties are: 1. They Slope Negatively or Slope Downwards from the Left to the Right 2. They are Convex to the Origin of Axes 3. Every Indifference Curve to the right represents Higher Level of Satisfaction than that of the Proceeding One and Others.
What is the second property of the inference curve?
The second property of the Indifference Curve is that they are generally convex to the origin of the axes—the left hand portion is normally steep while the right hand portion is relatively flat. This property of the Indifference Curve is derived from the Law of Diminishing Marginal Rate of Substitution. The marginal rate of substitution neither increases nor does it remain constant.
Why are indifference curves like Bangles?
This is so because Indifference Curves are assumed to be negatively sloping and convex to the origin. An individual can move to the higher indifference.
Why are indifference curves not based on cardinal measurability?
Secondly, the rate of substitution between the two commodities need not be the same in all the indifference schedules.
What is the difference between point A and point B?
Since point A is an Indifference Curve IC 2, it represents a higher level of satisfaction to the consumer c than point B which is located on the lower Indifference c Curve IC 1. Point C, however lies on both the curves. This m means that two levels of satisfaction, A and B which are by definition unequal manage to become equal at the point C. This is clearly impossible.
Can an infference curve intersect?
Indifference Curve can never intersect each other: 5. Indifference Curves are not Necessarily Parallel to each other. Although, they are Falling and Negatively Inclined to the Right: Yet the rate of the fall will not be the same for all Indifference Curves.
Is a falling curve whose slope diminishes as we move to the right bound to be convex?
In this diagram, an increase of oranges from OM to OM 1 is accompanied by a progressively diminishing number of bananas from ON to ON 1. Thus a falling curve whose slope diminishes as we move to the right is bound to be convex to the origin to axes.