The better sets for points X, Y and Z, respectively are convex but none is strictly convex. It follows that the combination F will be equivalent to E in terms of satisfaction. The locus of all commodity combinations from which the consumer derives the same level of satisfaction forms such a curve. Secondly, the rate of substitution between the two commodities need not be the same in all the indifference schedules. The curves will lie very close to one another and may even become indistinguishable from one another. 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. Complements are thus those goods which are used jointly in consumption so that their consumption increases or decreases simultaneously.
Indifference curve has a negative slope In order to remain on the same level of satisfaction same indifference curve , the consumer must sacrifice one commodity for another. As the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes as X for Y along an indifference curve. Therefore, two indifference curves can never intersect each other. Indifference curves are always convex to the origin: This property of an indifference curve is based on diminishing marginal rate of substitution, which is the assumption of indifference curve analysis. Due to this assumption, an indifference curve is convex to the origin. So far we have established only that the line slopes downward from left to right.
Case Study Ms Amita's Indifference Curve is based on her commodity baskets of rice and wheat. Introduction to Indifference Curves 2. The axiom holds only for economic goods. Non-Intersecting Indifference Curves: An important property of indifference curves is that they, representing distinct levels of preferences cannot meet or intersect. Each basket gives her equal level of satisfaction. Therefore, an indifference curve cannot slope upward from left to right.
This axiom implies that points in the indifference set for X if there are any besides X must lie in areas A and C. Hence, strict convexity rules out the possibility of indifference curves cutting the axes. Significance of Indifference Curve Analysis: In indifference curve approach only ordination of preferences is needed. Similarly, D is a point of satiation in respect of x 1 so that after D the indifference curve begins to bend upwards through E. The different combinations of two goods on the scale of preferences would get the consumer equal satisfaction.
Suppose the consumer prefers any bundle with more x 1, regardless of the amount of x 2 in the bundle. But a glance at Fig. In other words, the combinations which lie on a higher indifference curve will be preferred to the combinations which lie on a lower indifference curve. Every Indifference Curve to the right represents Higher Level of Satisfaction than that of the Proceeding One and Others. Non Satiety: It is assumed that the consumer has not reached the point of saturation. We can clearly see that the rate of decrease in consumption of coffee is not the same as rate of increase in consumption of cigarette. Curves I 2 and I 3, until he reaches the saturation upon S where his total utility is the maximum.
The so-called lexicographic ordering satisfies assumptions 1 to 4, but each of its indifference sets consist of only one point Fig. They were of the opinion that utility is a psychological phenomenon and it is next to impossible to measure the utility in absolute terms. Article shared by : We may now examine the implications of the axioms in the context of the properties of indifference curves. Yet no utility function exists that represents this preference ordering. This m means that two levels of satisfaction, A and B which are by definition unequal manage to become equal at the point C. Concavity of the indifference curves is against the principle of diminishing marginal rate of substitution.
The main problem with indifference curves to describe preferences is that they do not show the consumer which bundles are better and which are worst. In other words, if a consumer moves among bundles in the indifference set, he can only do this by substituting or trading off the goods — giving more of one good must require taking away some of the other good so that he can stay within the indifferent set. According to diminishing marginal rate of substitution, the rate of substitution of commodity X for Y decreases more and more with each successive substitution of X for Y. Here the two axes represent the consumption of two goods x 1 and x 2. By assumption the indifference curves represent distinct levels of preference. But the two indifference curves cutting each other lead us to an absurd conclusion of A being equal to Bin terms of satisfaction. The axiom of dominance does not enable us to say anything about this point.
Indifference curves slope downward to the right: This property implies that an indifference curve has a negative slope. Thus an indifference curve is always convex to the origin because the marginal rate of substitution between the two goods declines. Similarly all points on 0W are inferior to X. Other possibilities could be a concave to the origin and b straight line. Testing the Properties of Indifference Curves. Strictly convex indifference curves produce well behaved preferences. Such a situation is encountered when the difference in utility between two points Y and X is so small that even a rational consumer cannot perceive it, i.
Hence the consumer must prefer Q to S. If they did, the axes would become extensions of the indifference curves. . So what is the slope of the indifference curve through X 0? Allen in their research paper,' A Reconsideration of the Theory of Value' criticized Marshallian cardinal approach of utility and propounded Indifference curve theory of consumer's demand. Monotonic Preferences : Monotonic preference means that a rational consumer always prefers more of a commodity as it offers him a higher level of satisfaction. As a result, the new budget lines will shift towards right on the x-axis. Hence, the marginal rate of substitution of X for Y remains constant.
The better substitutes the two goods are for each other, the closer the indifference curve approaches to the straight line so that when the two goods are perfect substitutes the indifference curve is a straight line. The degree of convexity of an indifference curve depends on the rate of fall in the marginal rate of substitution of X for Y. This property follows from assumption I. However, the theory assumes that a consumer can express utility in terms of rank. The consumer will get additional supplies of oranges by sacrificing diminishing quantities of bananas. It is also called as Ordinal Approach. In combination T, the sacrifice falls to 2 bananas for 1 apple.