Thus, indifference curves cannot be concave to the origin. The combinations P, Q, R, S and T give equal satisfaction to the consumer and therefore he is indifferent among them. Bundle Z has less of both and is clearly not equivalent. That is, they slope downward from left to right. The same reasoning applies if two indifference curves touch each other at point С in Panel B of the figure. It is not an iso-utility curve. This is because of Diminishing Marginal Rate of Substitution.
Trade-offs To expand upon this definition further, the business concept of opportunity cost via trade-offs is a central building block in understanding budget constraints. Indifference Curves are Negatively Sloped. The basic premise behind this curve is that the varying income levels as illustrated by the green income line curving upwards will determine different quantities and balanced baskets along the provided indifference curves for the two goods being compared in this graph. Indifference curves slope downward to the right: This property implies that an indifference curve has a negative slope. This also assumes that the marginal rate of substitution is always positive.
If a curve does not have a negative slope as shown in figure 3, it cannot be an indifference curve. It is convex to the origin. He cannot therefore indifferent between P and Q. Significance of Indifference Curve Analysis: In indifference curve approach only ordination of preferences is needed. The slope of an indifference curve shows the rate of substitution between two goods, i. Total utility of the consumer is assumed to depend on the quantities of the various goods consumed i.
Alternately, indifference curve is a locus of points that show such combinations of two commodities which give the consumer same satisfaction. Table: Indifference schedule Combination Cigarette Coffee A 1 12 B 2 8 C 3 5 D 4 3 E 5 2 The above table represents various combination of coffee and cigarette that gives a man same level of utility. An indifference curve is a contour line that slopes downward from left to right, showing equal levels of satisfaction on each of its points, with the given amount of income spent on different combinations. In the Figure 6, the tangent at point A makes a bigger angle on the X axis than the tangent at point B which makes a smaller angle. For normal goods or services, demand is illustrated with a downward sloping curve, where the quantity on the x-axis will generally increase as the price on the y-axis decreases and vice versa. A higher indifference curve indicates a higher satisfaction level.
Since any combination of the two goods on an indifference curve gives equal level of satisfaction, the consumer is indifferent to any combination he consumes. Goods such as high-end luxury items like expensive fashion often demonstrate this type of counter-intuitive trend, where the high price of an item is attractive to the consumer for the sake of displaying wealth. That is to say that each point along the curve is considered by the consumer of equivalent value despite alterations in the quantity of each good, as these trade-offs are consider of equal value and thus indifferent. He can can ware two bundles of goods x and y according to the satisfaction derived by the consumer i. As a result, consumers analyze the optimal way in which to leverage their purchasing power to maximize their utility and minimize opportunity costs.
A normal indifference curve will be convex to the origin and it cannot be concave. Through utilizing these economic tools, economists can predict consumer behavior and consumers can maximize their overall utility based upon their budget constraints. In order, therefore, to be consistent with our assumptions; different indifference curves would not cut each other. But the indifference curve cannot be concave to the origin. Pen and ink, right shoe and left shoe, automobile and petrol sauce and hamburger, type writer and typists are some examples of perfect complements.
Any numbers can be given to indifference curves. To understand why this is the case, we can look at what would happen if they did intersect. Due to this, the consumer is willing to give up more bananas for an additional apple. Strictly convex indifference curves produce well behaved preferences. Combination at point Q contains more of both the goods X and Y than that of the combination at point S.
This implies that slop of indifference curve decreases in absolute terms as we substitute one good for another. This is born out of our assumption that the consumer is considering different combinations of two commodities. It overcomes the weakness of Cardinal measurement as the satisfaction cannot be measured objectively. Therefore the indifference curve will not touch either the X axis or Y axis. The graph shows a combination of two goods that the consumer consumes.
It is the declining significance of x and increasing significance of y as the consumer travels down an indifference curve which makes its shape convex to the origin and this forms the basis of Prof. The graphical representation of such combinations is termed as indifference curve. Let us consider the logical inferences or conclusions if the indifference curve does not slope downwards from left to right. This gives the conclusion that as the consumer travels down the indifference curve, the marginal significance of x has become greater as the respective angles of tangents are greater. 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. Thus, averages are preferred to extremes. The marginal do not rate of substitution increases nor does it remain constant.
Indifference curve is convex to the origin As mentioned previously, the concept of indifference curve is based on the properties of diminishing marginal rate of substitution. Consumers must weigh the overall utility they can capture by making a purchase and benchmark that against their overall monetary resources to optimize their purchasing decisions. The same argument holds good in this case as developed above in the case of intersection of indifference curves. They are Convex to the Origin of Axes: The second property of the Indifference Curve is that they are generally convex to the origin of the axes—the left hand portion is normally steep while the right hand portion is relatively flat. This correlation between the price of goods and the willingness to make purchases is represented clearly by the generation of a demand curve with price as the y-axis and quantity as the x-axis. Higher Indifference Curve Represents Higher Level of satisfaction. The consumer will always try to move up in the indifference map so that he can occupy as much as possible the topmost curve, as higher curves give larger satisfaction in the difference map.