It is not a boundary line separating preferred bundles from non-preferred ones. An example of an indifference map with three indifference curves represented In , an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. Example: Consider 2 goods: Apples A and Bananas B. Change in Y when I get a certain change in X, when I get a certain change in X. Introduction to Budget Lines A consumer's budget line, like an indifference curve, is a graphical depiction of assorted combinations of two goods that the consumer can afford based upon their current prices and his or her income. In other words, the indifference curve is relatively flatter in its right-hand portion and relatively steeper in its left-hand portion.
Examples of goods that are perfect substitutes are not difficult to find in the real world. We know that more is better showing higher utility for the consumer. It is the declining significance of x and increasing significance of y as the consumer travels down an indifference curve which makes its shape convex to the origin and this forms the basis of Prof. Before publishing your Articles on this site, please read the following pages: 1. We know that consumers in actual world do not generally buy and consume one good.
And, diminishing marginal rate of substitution states that the rate by which a person substitutes X for Y diminishes more and more with each successive substitution of X for Y. Indifference curve slope downwards: It implies that as a consumer consumes more of one good, he must consume less of the other good. This means that you are willing to forego four cups of coffee to consume one more pizza. Now that we know what you prefer and what you don't prefer, let's think about the combinations of goods that will leave you indifferent. Hence, you get increasing marginal rate of substitution of X for Y. In such cases the indifference curve is a straight line at an angle of 45 degree with either axis. Only in a downward sloping curve the loss in one is compensated by the gain in another commodity so that the different points on the curve will be of equal significance and satisfaction to the consumer and he may be indifferent to the various combinations.
When the consumer increased the consumption of commodity X to X2, the amount of commodity Y fell to Y2. Consider this combination -- two pizzas and two cups of coffee. At point B, the consumer gets more of x than at point A and at point C, the consumer gets still more of x while the quantity of y remains constant. This violates the basic assumption of indifference curves. In the case of concave curve, it will lead to increasing marginal rate of substitution which is impossible. The marginal significance of x should become smaller and smaller as he possesses larger and larger quantities of x. The higher the position of a curve i.
Point A lies on both I 1, and I 2. Because we view pizza and coffee as good things, things that bring us utility, we always want more of them. The process then continues until the market's and household's marginal rates of substitution are equal. 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. With this preference ordering, no two distinct bundles are indifferent; indifferent sets are singletons. Two commodities: It is assumed that the consumer has a fixed amount of money, whole of which is to be spent on the two goods, given constant prices of both the goods.
An indifference curve on the right is preferred than the indifference curve on the left. This green point right over here, I have the same number of bars as a point on the curve, but I have a lot more pounds of fruit. What is the Marginal Rate of Substitution for Ms. Over here, if we go over here the slope looks a little bit different. In this case, we are better off when we get closer to the origin. This right over here is called our marginal rate of substitution. Description: Graphically, the indifference curve is drawn as a downward sloping convex to the origin.
In the past we've thought about maximizing total utility. They were of the opinion that utility is a psychological phenomenon and it is next to impossible to measure the utility in absolute terms. So the consumer cannot be indifferent, as having rational behavior, he would prefer D more than C, C more than B and B more than A and the level of satisfaction is not the same. In that case indifference curve will touch one axis. Here your marginal rate of substitution is constant along your indifference curves, and is one. This kind of ordering is shown in Fig.
. Indifference curve analysis strictly says that utility is not a measurable entity. It is a locus of points sharing alternative combinations of apple and orange which give the same satisfaction to the consumer. This means that the indifference curve at a higher level from the axes shows greater satisfaction than an indifference curve at a lower level. Therefore, two indifference curves cannot intersect each other. To be equivalent to h it must have less apple A. Rational consumers According to this theory, a consumer always behaves in a rational manner, i.
It is for this reason that we reject indifference curves of concave or straight-line shapes and assume that indifference curves are normally convex to the origin. An indifference curve is the locus of all the points, representing different combinations, that are equally satisfactory to the consumer. On a curve like this, the slope is constantly changing. Axiom of Non-Satiation Monotonicity : The axiom of dominance is also known as the axiom of non-satiation or the axiom of monotonicity. The axiom of weak convexity suggests that the better set is convex but not strictly so. What should you do now? Indifference Curves Have a Negative Slope: Let us consider any two combinations of goods on the same indifference curve, such as h and g. For most goods the marginal rate of substitution is not constant so their indifference curves are curved.
So indifference curve is convex to the origin. If you are thinking marginal utility, you nailed it! Thus, in indifference curve analysis, we conclude that the consumer prefers apple to orange. This would be your indifference map. Non Satiety: It is assumed that the consumer has not reached the point of saturation. Indifference curves, like many aspects of contemporary , have been criticized for oversimplifying or making unrealistic assumptions about human action. Perfect complements are another extreme case.