Pawan Kumar ME: Unit 2; Chap 4 Indifference curves: Indifference curve is an analysis under ordinal utility.

In this all the combination of goods or the services gives equal level of satisfaction. A consumer would be indifferent between the combinations of the goods. It assumes: 1. Rationality: The indifference curve analysis assumes that the consumer is rational in the sense that he chooses such combination of goods with his limits resources to maximize the satisfaction. 2. Complete ranking: It assumes that the consumer can rank his order of preference, i.e. If he consumes A, B, C and D combination of goods he can prefer A to B or B to C or can be indifferent between them. 3. Transitivity: Indifference curve assumes that consumer preference is transitive in nature. This means if one prefer A to B and again B to C then he must prefer A to C. This states that if a person gets higher satisfaction from A than B and more from B than C, he must get more from A than that of C. 4. Decreasing marginal rate of substitution: It assumes that marginal rate of substitution goes on falling as the combination moves. That is consumer gives less and less of one commodity to gain one extra unit of other commodity. Indifference curve can be explained and understood from the indifference schedule: Combination Good X Good Y MRS A 1 20 B 2 14 6 C 3 10 4 D 4 8 2 E 5 7 1 Indifference schedule In the above table in combination A consumer consumes 1 unit of X and 20 units of Y. As the consumer moves from combination A to B he gives up 6 units of Y to gain one unit of X. Here loss of utility due to loss in 6 units of Y is just been balance by the one unit gain of commodity X. In the above table all the combination gives equal level of satisfaction. In the table the quantity of X and Y are arranged in such a manner that the consumer is indifferent between them. In the above schedule, consumer gets same level of satisfaction by consuming X+20Y, 2X+14Y, 3X+10Y, 4X+8Y and 5X+7Y. Since satisfaction would be same whatever be the combination of goods, he would be indifferent between the combinations of goods. Indifference curve can be shown in the figure by plotting all the combination of indifference schedule. 25 20 15 10 5 0 1 2 3 4 5

In the figure, quantity of good X is measured along X-axis and the quantity of good Y is measured along Y-axis. IC is the indifference curve which we get after plotting the combination of goods which is shown in the above indifference schedule and joining them. The slope of the IC is downward sloping convex to the origin. The level of satisfaction at every combination is same which is shown in the indifference curve. Here combination A, B, C, D and E represent equal level of satisfaction. Indifference map: Indifference map is the set of ICs drawn on the same sheet. It is important in the sense that there may be various IC and as higher indifference curve gives higher level of satisfaction consumer always wants to be in higher indifference curve. It is graphically shown as below: IC2 IC1

Goods Y

Goods X In the figure two are three indifference curves drawn where quantity of X and Y are measured along X and Y axis respectively. We know that higher indifference curve represents the higher level of satisfaction. This is to say the satisfaction derived by the consumer on the consumption of combination of goods on IC 2 is greater than satisfaction derived from combination of good on IC 1. So the consumer always wants to reach the highest indifference curve but he has the budget constant. Since the utility is psychological concept consumer can only rank the preference or he can only say that he gets more satisfaction on IC 2 than in IC 1, he can not say by how much IC 2 is higher than IC 1. Properties of indifference curve 1. Slopes downward to the right Indifference curve slopes downward, which implies that IC has negative slope. This property follows from the assumption of non-satiation, that is consumer prefer more of goods to less of it. Indifference curve being downward sloping means that when quantity of one commodity in a combination rises quantity of other goods falls so as to keep the consumer in the same indifference curve. This can be shown in the figure as below:

S Goods Y S1

Q Q1 Goods X In the figure IC is downward sloping which shows that when the quantity of one good in a combination falls the quantity of other commodities has to rise to keep the same level of satisfaction. In the figure when the quantity of commodity Y falls from S to S 1 the quantity of X has to rise from Q to Q 1 so as to compensate the utility which is lost.

2. Upward sloping Indifference curve cannot be upward sloping. Upward sloping IC means when the quantity of one good rises, other commodity also rises. This does not hold the law. This is shown in the figure as:

S1 Goods Y S

Q1

Goods X

In the above figure IC is upward sloping. This means that when the combination moves from A to B both the commodity rises and if both the commodity increases the level of satisfaction would not be the same as previous. Thus IC cannot take this shape. 3. Straight line parallel to X-axis Indifference curve cannot take the shape of straight line parallel to X axis. This means when the quantity of commodity X rises the quantity of Y commodity remains the same. In fact it is not possible.

S Goods Y

Q1

Q2 Goods X

Q3

In the figure as the quantity of commodity rises in the combination the quantity of Y remains the same. Here quantity of Y in the combination A, B, C and D is same as quantity of X increases. Thus this does not hold the law. 4. Indifference curve cannot be parallel to the Y-axis Indifference curve cannot be parallel to the Y-axis. This means when the quantity of commodity Y increases the quantity of commodity X remains the same. It is shown in the figure:

S3 Goods Y S2 S1

C B A Q Goods X

In the figure IC is parallel to Y-axis which shows that when the combination moves from A to B to C the quantity of commodity Y increase but the quantity of X remains constant. This too does not hold the law. Thus indifference curve must slope downward to show that when the quantity of one commodity in a combination rises the quantity of other commodity must fall to keep the level of satisfaction unchanged.

5. Indifference curve is convex to the origin Indifference curve is convex to the origin showing that marginal rate of substitution is decreasing. This property says that MRS of a good X for the good Y falls as more quantity of X is substituted for good Y. This is shown in the following graph.

S1 S2 Goods Y Q1 Q2 Goods X Here in the upper figure IC is convex to the origin showing that MRS of a commodity Y to X is falling. This means a consumer is ready to give up more of Y to get one extra unit of X in the first. 6. Downward sloping straight line Indifference curve cannot take the shape of downward sloping straight line. This means the marginal rate of substitution of Y commodity to X commodity is constant, instead of decreasing it is always the same. This is shown in the figure as:

S3 Goods Y S2 S1

Q1

Q2

Q3 Goods X

Here S3 S2 = S2 S1 In the figure IC is the straight line downward sloped which shows that marginal rate of substitution of good X for Y is constant. In the figure Y 1=Y 2 for the quantity of good X. 7. Higher indifference curve represent higher level of satisfaction than lower IC The property says that higher indifference curve represents higher level of satisfaction than that of lower IC. In other words consumer prefer those combination of goods which lies in the higher indifference curve. This is shown in the figure as: IC1 IC S2 Goods Y S1 B A

Q1

Goods X

In the figure good X and good Y are measured along X-axis and Y-axis respectively. Here IC and IC 1 represent the different level of satisfaction. In the figure combination of commodity B is preferred to the combination of good A because at combination B more quantity of good Y is consumed and quantity of good X is constant to each IC. Thus greater quantity of commodity yields higher satisfaction.