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    Indifference Curve: Combination Food Clothing

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    Abhigyan Gupta
    The document discusses indifference curves, which represent combinations of goods that provide the same level of consumer satisfaction. Indifference curves have specific properties: they slope downward, are convex, never intersect, and a higher curve indicates greater satisfaction than a lower one. The marginal rate of substitution measures how much of one good a consumer is willing to give up in exchange for another good while maintaining the same satisfaction. As more of a good is consumed, the marginal rate of substitution decreases.

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    Indifference Curve: Combination Food Clothing

    Uploaded by

    Abhigyan Gupta
    96 views6 pages
    The document discusses indifference curves, which represent combinations of goods that provide the same level of consumer satisfaction. Indifference curves have specific properties: they slope downward, are convex, never intersect, and a higher curve indicates greater satisfaction than a lower one. The marginal rate of substitution measures how much of one good a consumer is willing to give up in exchange for another good while maintaining the same satisfaction. As more of a good is consumed, the marginal rate of substitution decreases.

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    Indiffernce Curve

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    The document discusses indifference curves, which represent combinations of goods that provide the same level of consumer satisfaction. Indifference curves have specific properties: they slope downward, are convex, never intersect, and a higher curve indicates greater satisfaction than a lower one. The marginal rate of substitution measures how much of one good a consumer is willing to give up in exchange for another good while maintaining the same satisfaction. As more of a good is consumed, the marginal rate of substitution decreases.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    96 views6 pages

    Indifference Curve: Combination Food Clothing

    Uploaded by

    Abhigyan Gupta
    The document discusses indifference curves, which represent combinations of goods that provide the same level of consumer satisfaction. Indifference curves have specific properties: they slope downward, are convex, never intersect, and a higher curve indicates greater satisfaction than a lower one. The marginal rate of substitution measures how much of one good a consumer is willing to give up in exchange for another good while maintaining the same satisfaction. As more of a good is consumed, the marginal rate of substitution decreases.

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    Indifference Curve

    A popular alternative to the marginal utility analysis of demand is the Indifference


    Curve Analysis. This is based on consumer preference and believes that we
    cannot quantitatively measure human satisfaction in monetary terms. This
    approach assigns an order to consumer preferences rather than measure them in
    terms of money.

    What is an Indifference Curve?

    It is a curve that represents all the combinations of goods that give the same
    satisfaction to the consumer. Since all the combinations give the same amount of
    satisfaction, the consumer prefers them equally. Hence the name Indifference
    Curve.

    Here is an example to understand the indifference curve better. Peter has 1 unit of
    food and 12 units of clothing. Now, we ask Peter how many units of clothing is he
    willing to give up in exchange for an additional unit of food so that his level of
    satisfaction remains unchanged.

    Peter agrees to give up 6 units of clothing for an additional unit of food. Hence,
    we have two combinations of food and clothing giving equal satisfaction to Peter
    as follows:

    1. 1 unit of food and 12 units of clothing


    2. 2 units of food and 6 units of clothing
    By asking him similar questions, we get various combinations as follows:

    Combination Food Clothing

    A 1 12

    B 2 6
    C 3 4

    D 4 3

    Graphical Representation:

    The diagram shows an Indifference curve (IC). Any combination lying on this
    curve gives the same level of consumer satisfaction. It is also known as Iso-Utility
    Curve.

    Indifference Map

    An Indifference Map is a set of Indifference Curves. It depicts the complete


    picture of a consumer’s preferences. The following diagram showing an
    indifference map consisting of three curves:
    We know that a consumer is indifferent among the combinations lying on the
    same indifference curve. However, it is important to note that he prefers the
    combinations on the higher indifference curves to those on the lower ones.

    This is because a higher indifference curve implies a higher level of satisfaction.


    Therefore, all combinations on IC1 offer the same satisfaction, but all
    combinations on IC2 give greater satisfaction than those on IC1.

    Marginal Rate of Substitution

    This is the rate at which a consumer is prepared to exchange a good X for Y. If we


    go back to Peter’s example above, we have the following table:

    Combination Food Clothing MRS

    A 1 12 –

    B 2 6 6
    C 3 4 2

    D 4 3 1

    In this example, Peter initially gives up 6 units of clothing to get an extra unit of
    food. Hence, the MRS is 6. Similarly, for subsequent exchanges, the MRS is 2
    and 1 respectively. Therefore, MRS of X for Y is the amount of Y whose loss can
    be compensated by a unit gain of X, keeping the satisfaction the same.

    Interestingly, as Peter accumulates more units of food, the MRS starts falling –
    meaning he is prepared to give up fewer units of clothing for food. There are two
    reasons for this:

    1. As Peter gets more units of food, his intensity of desire for additional units
    of food decreases.
    2. Most of the goods are imperfect substitutes for one another. If they could
    substitute one another perfectly, then MRS would remain constant.

    Properties of an Indifference Curve or IC

    Here are the properties of an indifference curve:

    An IC slopes downwards to the right


    This slope signifies that when the quantity of one commodity in combination is
    increased, the amount of the other commodity reduces. This is essential for the
    level of satisfaction to remain the same on an indifference curve.

    An IC is always convex to the origin


    From our discussion above, we understand that as Peter substitutes clothing for
    food, he is willing to part with less and less of clothing. This is the diminishing
    marginal rate of substitution. The rate gives a convex shape to the indifference
    curve. However, there are two extreme scenarios:
    1. Two commodities are perfect substitutes for each other – In this case, the
    indifference curve is a straight line, where MRS is constant.
    2. Two goods are perfect complementary goods – An example of such goods
    would be gasoline and water in a car. In such cases, the IC will be L-shaped
    and convex to the origin.
    Indifference curves never intersect each other
    Two ICs will never intersect each other. Also, they need not be parallel to each
    other either. Look at the following diagram:

    Fig 3 shows tow ICs intersecting each other at point A. Since A and B lie on IC1,
    the give the same satisfaction level. Similarly, A and C give the same satisfaction
    level, as they lie on IC2. Therefore, we can imply that B and C offer the same
    level of satisfaction, which is logically absurd. Hence, no tow ICs can touch or
    intersect each other.

    A higher IC indicates a higher level of satisfaction as compared to a lower


    IC
    A higher IC means that a consumer prefers more goods than not.

    An IC does not touch the axis


    This is not possible because of our assumption that a consumer considers different
    combinations of two commodities and wants both of them. If the curve touches
    either of the axes, then it means that he is satisfied with only one commodity and
    does not want the other, which is contrary to our assumption.

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