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what is indifference curve in finance

by Allan Bogan Published 2 years ago Updated 2 years ago
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What is the Indifference Curve?

  • An indifference curve is a graph that shows the combination of two goods for which a consumer is different.
  • When two goods or products with different qualities give a consumer the same level of satisfaction and utility, an indifference curve is realized.
  • In an indifference curve, a consumer has no preference for either of the combination of goods.

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An indifference curve, with respect to two commodities, is a graph showing those combinations of the two commodities that leave the consumer equally well off or equally satisfied—hence indifferent—in having any combination on the curve.

Full Answer

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.

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.

What are the properties of indifference curve?

Properties of Indifference Curve with Diagram

  1. All Combinations on an Indifference Curve Give Same Level of Satisfaction. ...
  2. A Higher Difference Curve Shows a Higher Level of Satisfaction. Another characteristic of the indifference curve is that hire the indifference curve higher will be the level of satisfaction.
  3. Indifference Curves always Slope Downwards from Left to Right. ...

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What does an indifference curve show?

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.

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What is indifference curve give example?

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 indifference curves used for?

The slope of the indifference curve at any point is the negative marginal utility of good A as a proportion of the marginal utility of good B. It indicates that the optimal consumption bundle – the marginal rate of substitution between goods A and B – is the ratio of their prices.

What is indifference curve and its features?

An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer.

What are the types of indifference curve?

There are two types of indifference curves: perfect complements indifference curves and perfect substitutes indifference curves.

What is indifference curve and budget line?

A budget line shows combinations of two goods a consumer is able to consume, given a budget constraint. An indifference curve shows combinations of two goods that yield equal satisfaction. To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.

What are the five properties of indifference curve?

Characteristics of Indifference CurvesIndifference 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 is indifference curve in economics PDF?

 Acc to Kotsoyiannis, “An indifference curve is the locus. of points – particular combination of good which yield the same utility to the consumer, so that he is indifferent as to the particular combination he consumes.”

How do you find the indifference curve?

0:419:14How to Derive an Indifference Curve - YouTubeYouTubeStart of suggested clipEnd of suggested clipWe get y equals 100 divided by x squared. The next step is just to find various combinations of xMoreWe get y equals 100 divided by x squared. The next step is just to find various combinations of x and y that give the consumer a hundred units of satisfaction.

How do you draw an indifference curve?

That means that when constructing an indifference curve map, one must place one good on the X-axis and one on the Y-axis, with the curve representing indifference for the consumer wherein any points that fall above this curve would be optimal while those below would be inferior and the entire graph exists within the ...

What is Mrs formula?

MRS Formula The marginal rate of substitution is calculated using this formula: X and Y represent two different goods. d'y / d'x = derivative of y with respect to x. MU = marginal utility of two goods, i.e., good Y and good X.

Who developed indifference curve?

economist Francis Y. EdgeworthDeveloped by the Irish-born British economist Francis Y. Edgeworth, it is widely used as an analytical tool in the study of consumer behaviour, particularly as related to consumer demand.

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.

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 the slope of the budget line?

The slope of the budget line is the relative price of good A in terms of good B, equal to the price of good A as a ratio of the market price of good B. Moreover, the slope of the budget line subtracted by relative price represents the opportunity cost of consumption. There is an opportunity cost#N#Opportunity Cost Opportunity cost is one of the key concepts in the study of economics and is prevalent throughout various decision-making processes. The#N#because of the consumer’s limited budget. The budget line is shifted outwards by the price of goods becoming proportionally cheaper.

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, ...

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 –

What is the Indifference Curve?

In economics, an indifference curve is a curve that shows the combination of two goods that give a consumer equivalent satisfaction and utility. This curve indicates that a consumer is indifferent about the two products since he derives equal satisfaction from both.

How is the Indifference Curve Created?

The indifference curve is plotted on a standard graph with two dimensions or axis; the y and the x-axis. Each point, dimension or axis on the graph represents one type of good. On the graph, the indifference curve explains how a consumer shows no preference for either of the two commodities since he derives the same utility from them.

Criticisms and Complications

The major criticism of the indifference curves is that it makes unrealistic assumptions about human consumption patterns, preference and satisfaction level.

In a Sentence

Mia: Doc, if Harry Markowitz invented MPT, why is Warren Buffet more famous? Doc: Warren, like most practitioners, figured out that talking about theory shifts the client indifference curve away from investing.

Video

This video can be accessed in a new window or App , at the YouTube Channel or from below.

Video Script

The script includes two sections where we visualize and demonstrate the indifference curve.

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1.Indifference Curve Definition - Investopedia

Url:https://www.investopedia.com/terms/i/indifferencecurve.asp

34 hours ago  · An indifference curve is a graph that shows a combination of two goods that give a consumer equal satisfaction and utility, thereby making the consumer indifferent. Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget.

2.Indifference Curve - Corporate Finance Institute

Url:https://corporatefinanceinstitute.com/resources/knowledge/economics/indifference-curve/

3 hours ago An indifference curve is a concept used in economics to illustrate the relationship between two goods and the level of satisfaction an

3.Videos of What Is Indifference Curve In finance

Url:/videos/search?q=what+is+indifference+curve+in+finance&qpvt=what+is+indifference+curve+in+finance&FORM=VDRE

21 hours ago Indifference Curve. A curve on a graph where the x-axis represents a quantity of one good and the y-axis represents a quantity of a second good where the curve represents the universe of quantities with the same utility for a rational investor. The indifference curve is convex, or roughly U-shaped.

4.Indifference Curve - Definition, Properties, Analysis, …

Url:https://www.wallstreetmojo.com/indifference-curve/

14 hours ago  · An indifference curve represents a locus of points sharing between two different goods that give a consumer the same level of utility. An indifference curve is often used to showcase a consumers preference limitation when two goods of equivalence utility are considered, this means the consumer has no preference for any of the products.

5.Indifference curve financial definition of indifference curve

Url:https://financial-dictionary.thefreedictionary.com/indifference+curve

9 hours ago  · Indifference Curve is a term used in portfolio theory to describe investor demand for portfolios based on the trade-off between expected return and risk. It is a convex curve, meaning upward curving and where it meets the Efficient Frontier there is a match between supply and demand. This spot is called the Optimal Portfolio.

6.Indifference Curve - Explained - The Business Professor, …

Url:https://thebusinessprofessor.com/economic-analysis-monetary-policy/indifference-curve-definition

29 hours ago Indifference Curves 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 …

7.Indifference Curve Definition and Tutorial - FactorPad

Url:https://factorpad.com/fin/glossary/indifference-curve.html

13 hours ago Break-even point com­pares total sales and total cost of a product. Also, at break-even point total cost line intersects total sales line. As stated above, cost indifference signifies equality of total costs of two alternatives. At cost indifference point, …

8.Indifference Curves – Principles of Econ 2e - Whatcom

Url:https://textbooks.whatcom.edu/econ100/back-matter/indifference-curves/

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