Further, on the assumption of transitivity, he will be indifferent between and C. He will get maximum satisfaction when he is equating the marginal rate of substitution between the two goods with their price ratio. Secondly, with the fall in price, the good becomes cheaper. Now, while the first assumption does not, it appears that the second assumption really does compel you to regard utility as being not merely orderable but a measurable entity. However, there are some serious difficulties in adopting the statistical definition.
Article shared by : In this article we will discuss about the applications of indifference curve approach. In fact, the utility which a commodity possesses for a consumer is something subjective and psychological and therefore cannot be measured quantitatively. The ordinal method and the assumption of transitivity make this technique more realistic. In the preference theory, this law has been replaced by the principle of diminishing marginal rate of substitution. Exchange makes it possible for both the consumers to reach a higher level of satisfaction. That is, if each point on I 2 is strictly preferred to each point on I 1, and each point on I 3 is preferred to each point on I 2, each point on I 3 is preferred to each point on I 1.
Another characteristic of the indifference curve is that an indifference curve does not touch x-axis. Many other economists such as F. Indifference curve to the right represent higher level of satisfaction The first property tells you that there are infinite indifference curves. This ratio increases or decreases according to the quantity of the good that the consumer already has. Plotting on a graph the different combinations that contain more of one commodity and less of another would give downward sloping curve. It may, however, be pointed out that attempts have recently been made by some economists and psychologists to derive or measure indifference curves experimentally.
For example, while it may be perfectly sensible to compare whether three pairs of shoes and six shirts would give a consumer as much satisfaction as two pairs of shoes and seven shirts, the consumer will be at a loss to know and compare the desirability of an absurd combination such as eight pairs of shoes and one shirt. It can be seen from the Diagram 3. They assert that utility is a psychological feeling and the precision in measurement of utility assumed by Marshall is therefore unrealistic. The latter, according to Prof. Superiority of Indifference Curve Analysis: So far we have pointed out the similarities between the two types of analyses, we now turn to study the difference between the two and to show how far indifference curve analysis is superior to the Marshallian cardinal utility analysis. Properties of indifference curve There are four basic properties of an indifference curve.
However, what prevents you from achieving higher indifference curves is its budget constraint. In indifference curve analysis we study all these effects, namely, income effect, price effect and substitution effect. The convexity of the indifference curves implies that the marginal rate of substitution of X for Y diminishes as more and more of X is substituted for y. For this technique we build a pattern of indifference curves, each recording a chain of choices between alternatives which give equal satisfaction. Therefore, at the point of tangency, the slope of the Marginal Rate of Substitution has the same value as the relation of the relative prices indicated by the budget constraint.
Thus, indifference curve analysis is not free from defects of its own. Secondly, with the fall in price, the good becomes cheaper. By assuming independent utilities, Marshall completely bypassed the relation of substitution and complementarity between commodities. It can be seen from the following diagram: The diagram shows four indifference curves showing different combinations of two commodities X and Y showing different levels of satisfaction. Marshall failed to explain these cases.
Concavity of the indifference curves is against the principle of diminishing marginal rate of substitution. The Indifference Curve Example It is plotted simply by asking an individual what combination of goods he prefers, for example: 10 pens and 5 pencils; 15 pens and 3 pens; Or 20 pens and 2 pens. The modern theory of consumer behaviour is also known as the indifference curve approach. The substitution effect is reinforced through the of lower real income Beattie-LaFrance. But a limited success has been achieved in this regard. Also, two goods can never perfectly substitute each other.
A collection of selected indifference curves, illustrated graphically, is referred to as an indifference map. Meaning of Consumer's equilibrium Consumer's equilibrium is that point in which consumer consumes the combination of two goods by his limited income. At this point of tangency, both the curve and the line have the same slope. It Provides a Better Classification of Goods into Substitutes and Complements: The earlier economists explained substitutes and complements in terms of cross elasticity of demand. It is not based on the psychological assumptions, namely, cardinal utility, subjectivity of utility, etc. Substitutes and complements The shape of an indifference curve is helpful to understand whether commodities under consideration are substitutes or complements.
The sacrificing of second goods quantity will decreasing because, law of diminishing marginal rate of substitute will apply on it. Assume that there are two consumption bundles A and B each containing two commodities x and y. The problem is that these economists never described how to measure utility, since this is a subjective concept that does not report the same for another person. But any point within that curve, reports the same level of satisfaction. The technical term for this slope is the marginal rate of substitution, which indicates the amount of a good of the individual wants to do without a change of one unit over another. Microeconomics with Calculus 2nd ed. Marshall avoided the discussion of substitutes and complementary goods by grouping them together as one commodity.