BCom Notes Part I Economics Indifference Curve

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Indifference Curve

Qs. Define Indifference Curve?

OR

Explain the main characteristics or properties of Indifference Curve

OR

What are the consumption of Indifference Curve? Give their properties

The concept of ordinal utility implies that a consumer is able to compare the different level of satisfaction. He can judge satisfaction derived from a good or a combination of these is equal to greater than or less than another we can simply say.

He is in position to rank his preferences the difference curve analysis is based upon what is called preference indifference hypothesis. The consumer is assumed to be in a position to indicate his preference or indifference between various combination of goods.

Suppose we go in the market to purchase A,B,C, and D and we like A more than B that is said we prefer or indifference A to B similarly if we prefer C and D than we indifference C to D.

Utility derived by the combination of these goods rather in this combination we prefer A to B or B to A.

Now consider a consumer who wants to buy apples and mangoes. He does not purchase them as bi fairly.

If he likes mangoes than apples than he prefer mangoes to apples or if he like apples than mangoes he will prefer apples to mangoes.

The consumer abstains as much total satisfaction (total utility) from 11 apples and one mango and from 8 apples and 2 mangoes and other combinations. But that satisfaction is same in a combination.

Properties of Indifference Curve

We note the few properties of indifference curve.

1. An Indifference Curve Slopes downwards to the right

It is because when consumer decides to have more units of one of the two goods he will reduce the number of the units of the other goods. If he will remain on the same indifference curve than his level of satisfaction remain same.

If we see that preference of mangoes increase which shows indifference curve sloping downwards from left to right.

As our hypothesis that consumer is at the same level of satisfaction because he is on the same indifference curve.

Now if we see at point A, B, C we see from A to B consumer increase quantity of both good which is not possible so indifference curve never be sloped upward to right.

Indifference Curve is always sloped. Which show prefer of consumer at one good to another.

2. Two Indifference Curve Never cut Each Other

Our hypothesis is that consumer is at same level of satisfaction that is IC, Now suppose two Indifference curve intersect each other.

As we see that Point A is at higher Indifference Curve IC2 which shown he get higher satisfaction. Similarly at point he is cut lower Indifference Curve IC1 which shows he get less satisfaction point he get same same satisfaction of IC1 and IC2 which is practically not possible because our hypothesis is that consumer get same level of satisfaction.

It is proved that Indifference curve never intersect each other.

Indifference Curve are convex to the origin

Convexity means we use more and more of good X and Y less and less of good Y. The marginal rate of substitution of x for y goods falling.

As we see that the marginal rate of substitution (MRS) of many for apples falls while the MRS of mangoes for apples remains constant and MRS of mangoes for apples increase which is not happen in general.

Hence it is proved that Indifference Curve is convex to the origin.

Qs. Write short notes on Marginal Rate of Substitution

OR

What is Marginal Rate of Substitutions? Explain the Law of Diminishing Marginal Rate of Substitution?

Marginal rate of Substitution (MRS) shows how much of one commodity is substituted for how much of another MRS is an important tool of indifference curve.

As we see that when our consumer has 15 apples and no mangoes he will prepared to forgot 4 apples for 1 mango and yet remain at the same level of satisfaction.

In his second combination he will be prepared to accept 4 apples for the loss may be defined as the amount of apples that is scarified for obtaining one mango or it may also be defined as the amount for the loss of one mango so that he may remain at the same level of satisfaction.

In Hick’s Word

We may define Marginal rate of Substitution of X for Y as the quantity of Y. Which would just compensate the consumer for the loss of the marginal unit of X.

It’s a common observation that as we come to have more and more of one good, we shall be prepared to for you less and less of the other. It is simply says that MRS of good X for good Y will falls as we have more of x and less of Y which we see clearly in other combination and get ratios (3 : 1, 2 : 1, 1 : 1)

Consumer Equilibrium

Qs. How Consumer reaches equilibrium?

OR

Explain how a consumer can maximize his total satisfaction out of his limited resources.?

OR

Analyze the equilibrium of a consumer spending a given amount of money income on two commodities with a fixed price ratio

OR

Explain the law of diminishing marginal rate of Substitution

OR

Show that a consumer is in equilibrium when the MRS between two commodities becomes equal to their price ratio

The Consumer is said to be in equilibrium when he affairs the maximum possible satisfaction from his purchases given the prices in the market and amount of money he has for making purchase for consumer equilibrium position we have to consider following assumption.

Our consumer indifference map or scale of preference remain same throughout the analysis.

Price of goods in the market are give and constant.

He has a given and constant amount of money to spend on the goods and if he does not spend it on one goods be must spend it on the other.

Each of the goods is homogenous and divisible. The consumer acts rationally means he tries to maximize his satisfaction.

His income and the relative prices of the two goods for purchasing so equilibrium must on same at same point.

Price Income line AM contains all the possible opportunities of combining the two goods that are opportunities to our hypothetical consumer that why this line also called price opportunity line.

At point P consumer reaches at equilibrium at this point he buy OP of mangoes and OH of apples. Point p lies in Il3 which shows consumption highest indifference curve he can’t go more. Any point other than P gives less satisfaction to consumer. Thus at point P

So the necessary conditions for equilibrium are

• Price line must be tangent to indifference curve.
• Indifference must be convex to origin.