The Indifference Curve IC thus is a locus of different combinations of two goods that yield the same level of satisfaction. Suppose a college student, Janet Bain, enjoys skiing and horseback riding. Suppose she has $250 available to spend on these two activities each semester.
Since by moving to the dotted portion he gets negative utility, the effective region of the circular curve will be the convex portion. Indifference curve can be defined as the locus of points each representing a different combination of two good, which yield the same level of utility and satisfaction to a consumer. Likewise, the combinations B and C will give equal satisfaction to the consumer; both being on the same indifference curve IC1. If combination A is equal to combination C in terms of satisfaction, and combination B is equal to combination C, it follows that the combination A will be equivalent to B in terms of satisfaction. But a glance at Fig.8.5 will show that this is absurd conclusion since combination A contains more of good Y than combination B, while the amount of good X is the same in both the combinations.
Consumption decisions, such as how much automobile fuel to consume, come fundamentally from our preferences—our likes and dislikes. Human decision-making, driven by our preferences, is at the core of economic theory. Since we can’t consume everything our hearts desire, we have to make choices, and those choices are based on our preferences. Choosing based on likes and dislikes does not mean that we are selfish—our preferences may include charitable giving and the happiness of others. Some economists argue that the concept of indifference is hypothetical, and therefore incompatible with real-life economic actions taken by consumers.
Monotonic Preference means that a consumer will always prefer a larger bundle, as it gives him/her a higher satisfaction level. In other words, as a consumer prefers more goods, and a higher indifference curve will give a higher satisfaction level. The reason for the negative slope is that as a consumer increases the consumption of commodity X, he/ she sacrifices some units of commodity Y in order to maintain the same level of satisfaction. The degree of convexity of an indifference curve depends upon the rate of fall in the marginal rate of substitution of X for Y.
If the increase in one commodity gives a higher level of satisfaction, the decrease in the second commodity reduces the level of satisfaction, respectively. The solution at Z involves an increase in the number of days Ms. Bain spends horseback riding. Notice that only the price of horseback riding has changed; all other features of the utility-maximizing solution remain the same. Ms. Bain’s https://1investing.in/ budget and the price of skiing are unchanged; this is reflected in the fact that the vertical intercept of the budget line remains fixed. Ms. Bain’s preferences are unchanged; they are reflected by her indifference curves. Because all other factors in the solution are unchanged, we can determine two points on Ms. Bain’s demand curve for horseback riding from her indifference curve diagram.
Point X, where the rate at which she is willing to exchange one good for another equals the rate the market asks, gives her the maximum utility possible. These arguments about the shapes of indifference curves and about higher or lower levels of utility do not require any numerical estimates of utility, either by the individual or by anyone else. Given these gentle assumptions, a field of indifference curves can be mapped out to describe the preferences of any individual. An exchange of two days of skiing for one day of horseback riding would leave her at point T, and she would be as well off as she is at point S.
The MRS is the rate at which the consumer is willing to give up (or substitute) one good for another. For example, a consumer who values apples will be slower to give them up for oranges, and the slope will reflect this rate of substitution. An indifference curve is a chart showing various combinations of two goods or commodities that consumers can choose. At any point on the curve, the combination of the two will leave the consumer equally well off or equally satisfied—hence indifferent. The tangency condition between the indifference curve and the budget line indicates the optimal consumption bundle when indifference curves exhibit typical convexity. In Figure 4 (C) the indifference curve is shown as vertical and combination В is preferred to A as the consumer has more of Y and the same quantity of X.
This is because the combination of goods on an indifference curve provides the same level of utility to the consumer. When an individual consumes goods and services, the satisfaction gained or lost from consumption is called utility. Consumer preferences are defined by the consumption bundles that consumers face. A collection bundle is a bundle that maximizes the consumer’s total utility, given the consumer’s budget constraints. An indifference curve consists of different combinations of two goods giving the same satisfaction level to a consumer.
As we know, all combinations of good A and good B that lie on the same indifference curve make the consumer equally happy. Thus, all other combinations on both curves would have to provide the same level of satisfaction as well. However, if we compare point B and point C, we can see that point C offers more of good A and good B (90 and 140) as compared to point B (80 and 130). As we already learned above, consumers always prefer larger quantities. Therefore both curves can’t provide the same level of satisfaction, which means they can never intersect. An indifference curve essentially slopes downwards, which indicates that the total utility generated from all the combinations is the same.
Furthermore, people’s relative preferences have been found to change over time and depending on their social context. Marginal Rate of Substitution can be defined as the amount of Good Y sacrificed to obtain an additional unit of Good X without affecting the total satisfaction level. Some disregard the concept claiming that a concave indifference curve is even possible theoretically. In the practical scenario, the preference of a consumer keeps on changing, which makes this concept vague.
Indicates that an indifference curve must have a negative slope, or a slope that moves lower on the y-axis. To create an indifference curve, we want to identify bundles that this college student is indifferent about consuming. If a bundle has more burritos, the student will have to have fewer sandwiches and vice versa. By finding all the bundles that are just as good as [latex]A[/latex], like [latex]B[/latex] and [latex]C[/latex], and connecting them with a line, we create an indifference curve, like the one in the middle.
The same reasoning applies if two indifference curves touch each other at point С in Panel (B) of the figure. In case of perfect substitutes, the indifference curves are parallel straight lines because the consumer equally prefers the two goods and is willing to exchange one good for the other at a constant rate. The degree of convexity of an indifference curve depends on the rate of fall in the marginal rate of substitution of X for Y. 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.
Higher the indifference curve is, greater will be the level of satisfaction drawn out of it. Since a higher indifference curve resembles a larger quantity properties of indifference curve of the two goods. It is the slope of the indifference curve depending upon the willingness of a consumer to sacrifice one commodity for another.
The indifference curve is drawn to predict the animal’s behavior at various levels of risk and food availability. Moreover, it is only applicable to complementary goods where both the preferred products are not the perfect substitutes of each other. Point A on the I2 curve indicates a higher level of satisfaction than point В on the 12 curve, as it lies farther away from the origin.
If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. It follows that the combination F will be equivalent to E in terms of satisfaction. While all prisoners received approximately equal official rations (though some did manage to receive private care packages as well), their marginal rates of substitution between goods in the ration packages varied. Suppose Ms. Bain has chosen a combination of skiing and horseback riding at point S in Figure 7.14.
