BASIC INDIFFERENCE CURVE ( ECONOMIC GOODS)

INDIFFRENCE CURVE

An indifference curve represents different combinations of two goods that provide same level of satisfaction or utility. Furthermore, it means along the indifference curve utility remains constant.

source : google images

Assumptions

  1. All the commodities we consider are economic goods.
  2. Transitivity – if the consumer is indifferent between X and Y and consumer is indifferent between Y and Z therefore he must be indifferent between X and Z.
  3. Monotonicity – it means that the consumer prefers more. It also means that more is better which implies that marginal utility is positive.

 

Properties of indifference curve

  1. Indifference curve is strictly convex to the origin– this means that the indifference curve is in the shape of a half semicircle with its centre away from the origin. This is because –
  2. There is diminishing marginal rate of transformation– where marginal rate of transformation is the amount of good Y that the consumer is willing to give up in order to consume an additional unit of good X so the utility remains the same.
  3. Indifference curve is strictly convex to origin because of averages are preferred over extreme.
  4. Indiffrence curve is negatively sloped – due to assumption of monotonicity which means more is preferred.
  5. 2 indifference curves cannot intersect– due to the assumption of transitivity.
  6. higher indifference curve represents higher utility due to assumption of monotonicity.

Different shapes of indifference curves

  1. Imperfect substitutes – they are the goods which cannot be used in the place of each other. The shape is convex to the origin. 

    source : google images

  2. Perfect substitutes – 2 goods are perfect substitutes if consumer is ready to exchange one for the other at a constant rate. It means marginal rate of transformation will be constant and therefore indifference curve will be a straight line.
  3. Perfect compliments – both goods are always used together in a fixed proportion. For example – left shoe and right shoe. It will have a L shaped indifference curve.

source: google images

PERFECT COMPETITION A MARKET THAT DOESN;T EXISTS

CONSUMER BEHAVIOUR ANALYSIS(EQUILIBRIUM)

 

 

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