All other economic variables and possible complications are treated as stable or ignored unless placed on the indifference graph. Indifference curve, in economics, graph showing various combinations of two things usually consumer goods that yield equal satisfaction or utility to an individual. The meeting of two indifference curves at a point will also lead us to an absurd conclusion. The idea is every action necessarily demonstrates preference, not indifference, otherwise no action would take place. Since each indifference curve represents a different level of satisfaction, indifference curves can never intersect at any point. Bundle X has more bananas but fewer apples than bundle Y.
In other words, if they have a lot of good B, they are more willing to trade some of it in to get an additional unit of good A and vice versa. This becomes pretty obvious if we look at the illustration below. An indifference curve is always constructed on the assumption that, other things being equal, certain factors remain constant. Indifference curves are not necessarily parallel to each other. Otherwise, generally speaking, every consumer is willing to give up a bit of one good in order to get more of another and thus has a downward-sloping indifference curve. The classic indifference curve is drawn downward from left to right and convex to the origin, so that a consumer who is given a choice between any two points on it would not prefer one point over the other.
Hence, it is critical to understand the preferences of the consumer as these vary from individual to individual and market to market. Therefore, two indifference curves cannot intersect each other. Combination at point Q contains more of both the goods X and Y than that of the combination at point S. As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin. Then with N as reference point, we can establish P which is indifferent to N and so on. This kind of ordering is shown in Fig. We know that total utility of commodity tends to increase with increase in stock of the commodity.
The indifference curve analysis was developed by the British economist Francis Ysidro Edgeworth, Italian economist Vilfredo Pareto and others in the first part of the 20th century. Points S and R also lie on the budget line. Straight-line indifference curves of perfect substitutes are shown m Fig. Indifference curves are everywhere dense and cannot cross. Since grapes have gone cheaper, the consumer would like to purchase more of grapes in place of apples. Here X dominates Y, as does Z.
Indifference curve is convex to the origin As mentioned previously, the concept of indifference curve is based on the properties of diminishing marginal rate of substitution. Here we get a range of a thick region called band. Rational Consumer: The consumer is assumed to behave in a rational manner, i. Perfect complementary goods are used in a certain fixed ratio. One kind of economic good is placed on each axis.
It is not a boundary line separating preferred bundles from non-preferred ones. In a Nutshell Indifference curves are graphical representations of various combinations of two commodities which an individual considers equally valuable. Significance of Indifference Curve Analysis: In indifference curve approach only ordination of preferences is needed. It could have any of the shapes shown in Fig. All this means that the two perfect complements are used in a certain fixed ratio and cannot be substituted for each other In Fig. This means that, in-between W and Y there is a point which indicates a certain change of preferences up to W point X preferred, whereas from Y onwards each point on the ray 0Z is preferred 10 X.
As seen in Table 2. A consumer indifferent towards different combinations located on such a curve. If indifference curves were concave or straight lines, the consumer would succumb to monomania, that is, he would buy and consume only one good. As long as a consumer is on the same indifference curve a. First, the budget line should be tangent to the indifference curve in more technical terms, the slope of the budget line should equal the slope of the indifference curve.
This plane is comprised of finite points, each point representing the different combinations of goods X and Y. All the combinations on an indifference curve give the same level of satisfaction. It is also assumed that prices of both the commodities are constant. This is possible only if the indifference surface is everywhere continuous. To the right of X, all bundles contain more x 1; hence all points to the right of x 1, regardless of which quadrant they are in, are preferred to X. Indifference curve is a better tool to classify substitutes and complementary goods.