Define indifference curve in economics. Indifference Curves: Definition, Properties and Other Details 2022-11-03
Define indifference curve in economics
An indifference curve is a graphical representation of the different combinations of two goods that a consumer is willing to accept as being equally preferred. In other words, an indifference curve shows the different bundles of two goods that a consumer is indifferent between, meaning that the consumer would be equally satisfied with any of the combinations on the curve.
Indifference curves are typically used to represent a consumer's preferences in a two-good consumption space, where one good is plotted on the x-axis and the other good is plotted on the y-axis. The consumer's willingness to pay for each good is represented by the slope of the indifference curve, with a higher slope indicating a higher willingness to pay for the good on the y-axis.
Indifference curves have several important properties. First, they are downward sloping, meaning that as the quantity of one good increases, the quantity of the other good must decrease in order for the consumer to remain indifferent between the two combinations. This is because as the quantity of one good increases, the consumer's willingness to pay for the other good decreases.
Second, indifference curves cannot intersect, as this would imply that the consumer is indifferent between two combinations that have the same quantities of both goods, which is impossible.
Finally, indifference curves are convex to the origin, meaning that they have a bowed shape when plotted on a graph. This reflects the idea that as the consumer's consumption of one good increases, the consumer's marginal rate of substitution (the rate at which the consumer is willing to give up one good in exchange for the other) decreases.
In economics, indifference curves are often used to represent a consumer's preferences and to analyze consumer behavior in different market situations. For example, economists may use indifference curves to analyze how a consumer's consumption changes in response to a change in the price of one of the goods, or to analyze the consumer's optimal consumption choices given their budget constraint.
The rate gives a convex shape to the indifference curve. Only a curve convex to the origin can show this fact. Therefore, the marginal rate of substitution of orange for apple increases as the quantity of orange increases relatively to apple. The principle of diminishing marginal utility is illustrated here as the total utility increases at a diminishing rate with additional consumption. Therefore, the What Does an Indifference Curve Look Like? It is not necessary at this stage to know how much utility is obtained from an apple or an orange. What Defines the Convexity of Indifference Curves? Different values of c correspond to different indifference curves, so if we increase our expected utility, we obtain a new indifference curve that is plotted above and to the right of the previous one. The combinations A, B and C lie on IC 1, IC 2 and IC 3 respectively.
Indifference Curves in Economics: What Do They Explain?
Description: Basel-III is third in the series of accords following Basel-I and Basel-II. This part of the diagram is a conventional demand curve diagram. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say X and Y. The problems created by such comparisons were sought to be overcome by Scitovsky through the use of compensation principle. In simple words, any exchange of goods and services for other goods and services wi Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers. The extent by which C and B are better than A, can be stated only on the basis of some explicit social welfare function which converts the ordinal into quantifiable cardinal utility.
Indifference curve financial definition of indifference curve
MRS refers to the slope of the indifference curve, it shows the willingness of a consumer to give up one good for another. Others argue that concave indifference curves, as well as circular curves that are convex or concave to the origin at specific points, are theoretically possible. He is supposed to rank them in his order of preference and can state if he prefers one combination to the other or is indifferent between them. The compensation principle involves a strict value judgment which is not universally applicable. The consumer does not have sufficient funds to purchase all combinations of the two goods.
Indifference Curve: Meaning, Definition, Features, Indifference Map
This is called the Principle of Diminishing Marginal Substitutability. It is important to know that two indifferent curves can never intersect, they do not cross. Similarly we can say that the consumer is indifferent between A and B. There are, at the same time, several theorists who raised certain objections against their use. This means that combination L 10A+1B gives an equal level of satisfaction and utility as 9A+ 2B , 7A+4B and so on. Let I be a continuous line joining the small circles and other similar points.
A budget line is a locus of points showing alternative combinations of two goods that can be purchased with a fixed amount of money income and fixed prices of the two goods. The indifference curves on the Map show different levels of satisfaction or total utility. The line AB has important characteristics. The higher the position of a curve i. It is measured by the ratio of a change in quantity of Y commodity to a change in the quantity of X commodity.
Indifference Curves: Definition, Properties and Other Details
Suppose P x is the price of X and P y is the price of Y. This curve shows how a consumer is indifferent about two different goods that give the same level of satisfaction. Since point A I 2 like point C lies on I 1, the consumer is indifferent between A and C. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. Transitivity: The consumer is supposed to be consistent about his tastes and preference. Hence, when the quantity of one commodity A in a combination of two goods increase, the quantity of the other commodity O must decline. Assumptions: The indifference curve approach is based upon the following assumptions: 1.
What is Indifference Curve? Definition of Indifference Curve, Indifference Curve Meaning
Similarly, points A and C give the same satisfaction level, as they lie on IC2. The rate at which O is being substituted for A is 1, 2 and 3 units of O per unit of A in the three cases respectively. Barter Systemdates back to the old time when there was no money. Hence, no two ICs can touch or intersect each other. But with the same income M, he can also buy OM of X and PM of Y.
Indifference Curve: Definition, Indifference Map, MRS, Examples etc.
ADVERTISEMENTS: Suppose a consumer is asked to choose between the following two combinations: a. Indifference Curves Have a Negative Slope: Let us consider any two combinations of goods on the same indifference curve, such as h and g. Also See: Base Rate, Call Money Rate the hard currency came into existence, the most common form of trade was bartering. Updated November 26, 2022 What is an Indifference Curve? The farther from the origin, the greater utility is generated across all consumption bundles on the curve. On the other hand, a point inside the line point K represents under-spending by the consumer. Understanding Indifference Curves Standard indifference curve analysis operates using a simple two-dimensional chart. It follows, therefore, that there are more than one combination of apple and orange which are equally satisfactory to him.