Correspondingly, the equilibrium point will also shift the right words as shown in the following figure. In the case of those complementary goods which are jointly demanded like bread and butter, shoes and socks. These questions allow you to get as much practice as you need, as you can click the link at the top of the first question (“Try another version of these questions”) to get a new set of questions. Intermediate Microeconomics Copyright © 2019 by Patrick M. Emerson is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. Bundles can contain many goods, but to simplify, we will consider only pairs of goods.

Consumer always prefer more of both commodities, i.e. he always tries to move to a higher indifference curve to get higher and higher satisfaction. Consumer’s preference of 1st bundle as compared to 2nd bundle will be called monotonic preference as 1st bundle contains more of apples, although bananas are same. Each indifference what are the properties of indifference curve curve is a representation of particular level of satisfaction.

• It means as the stock of a commodity increases with the consumer, he substitutes it for the other commodity at a diminishing rate.
• This diminishing marginal rate of substitution gives a convex shape to an indifference curve.
• Similarly, the combinations showed by points B and E on indifference curve IC1 give equal satisfaction to the consumer.
• It is evident, therefore, that the higher the indifference curve, the greater the satisfaction it represents.

All higher indifference curves, like Uh, will be completely above the budget line and, although the choices on that indifference curve would provide higher utility, they are not affordable given the budget set. All lower indifference curves, like Ul, will cross the budget line in two separate places. Think about indifference curves that slope upward, as in figure 1.2.

• These combinations are given in the below indifference schedule.
• This fall in units of one good to gain more of another good gives a downward slope to the indifference curve.
• The theory of consumption is based on the scale of preference and the ordinal ranks or orders of one’s preferences.
• Given the definition of the indifference curve and the assumptions behind it, the indifference curves cannot intersect with each other.
• Watch this video to apply what you’ve learned about using indifference curves to find consumer equilibrium.

In a single commodity situation, there will be no opportunity to choose between alternatives or the concept of indifference. Given the definition of the indifference curve and the assumptions behind it, the indifference curves cannot intersect with each other. It is because, at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. Explanation of consumer’s Equilibrium with the help of indifference curve analysis.

Indifference Curves do not intersect

When a consumer consumes various goods and services, then there are some combinations, which give him exactly the same total satisfaction. The graphical representation of such combinations is termed as indifference curve. As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin. The Indifference Map refers to a set of Indifference Curves that reflects an understanding and gives an entire view of a consumer’s choices.

Watch the clip from this video carefully to see examples of indifference curves and what makes them useful. Each point on the indifference curves represents the same level of satisfaction. Notice that figure 1.5 illustrates a change in the good on the vertical axis (sandwiches) over the change in the good on the horizontal axis (burritos). From this discussion and graph, it should be clear that the latexMRS/latex is the same as the slope of the indifference curve at any given point along it. It implies that as a consumer consumes more of one good, he must consume less of the other good.

Likewise; if a consumer is indifferent towards A and B and he is also indifferent towards Band C, then he will also be indifferent towards A and C. More is better implies indifference curves are downward sloping.2. Transitivity and more is better imply indifference curves do not cross.3.

Indifference Curves Need Not Be Parallel to Each Other

An indifference curve is a contour line where utility remains constant across all points on the line. Each point on an indifference curve represents a consumption bundle, and the consumer is indifferent among all consumption bundles on the indifference curve. We know that the marginal utility of consuming a good decreases as its supply increases (see also diminishing marginal utility). Therefore consumers are willing to give up more of this good to get another good of which they have little.

Many core principles of microeconomics appear in indifference curve analysis including individual choice, marginal utility theory, income, substitution effects, and the subjective theory of value. If a good satisfies all four properties of indifference curves, the goods are referred to as ordinary goods. An entire utility function can be graphically represented by an indifference curve map, where several indifference curves correspond to different levels of utility.

Examples of Indifference Curve with Diagram

Consequently, A combination yields more satisfaction than C combination. So an indifference curve cannot be vertical or parallel to the oy-axis. The theory is based on the assumption of the maximisation of satisfaction by each individual consumer within his given income and market prices. He has perfect knowledge of market conditions regarding the availability of goods and their prices.

Theory of Production

The indifference curve analysis is indicated with a graphical representation. Where the X-axis indicates one commodity (Cloth) and Y-axis refers to another good (Book). Combinations of two goods on the curve provide Jack with the same level of satisfaction (represented by points A, B, C, D in the image). The slope of the curve at any given point represents utility for any combination of two goods. When it occurs, it is known as the marginal rate of substitution (MRS).

A consumer does not possess any good in more than the required quantity. It means as the stock of a commodity increases with the consumer, he substitutes it for the other commodity at a diminishing rate. If bundle A represents more of at least one good and no less of any other good than bundle B, then A is preferred to B. Now we can ask what bundles are better, worse, or the same in terms of satisfying this college student. Clearly, bundles that contain fewer of both goods, like latexBundle D/latex, are worse than latexA/latex, latexB/latex, or latexC/latex because they violate the more-is-better assumption.

Diminishing marginal rate of substitution:

The higher the indifference curves are, the larger the quantities of both goods. An indifference curve is defined as a curve that gives an equal level of satisfaction to a consumer at every possible combination. It is possible when a consumer is willing to sacrifice some quantity of a good to gain an additional unit of another good.

The various combinations that provide equal satisfaction to the consumer are grouped into two sets. Indifference curve analysis is based on the assumption of the diminishing marginal rate of substitution. If the indifference curve touches the vertical line(OY-axis) then he will consume a very large quantity of commodity Y while zero quantity of commodity X. It means if the income of the consumer changes or prices of goods falls or rise in the market, these changes will have no effect on the scale of preference of the consumer. It is further assumed that scale of preference of a consumer is not influenced by the scale of preference of another consumer. A consumer can determine his preferences on the basis of satisfaction derived from different goods or their combinations.

An indifference map shows all the indifference curves which rank the preference of the consumer. The further away from each successive indifference curve from the origin, the higher the level of utility it measures. In figure 5.2, four indifference curves IC1, IC2, IC3, and IC4 have been shown. The indifference curve indicates the various combinations of two goods that yield equal satisfaction to the consumer. The theory of consumption is based on the scale of preference and the ordinal ranks or orders of one’s preferences. Lilly’s budget constraint, given the prices of books and doughnuts and her income, is shown by the straight line.

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. MRSAB is the rate at which a consumer is willing to give up Bananas for one more unit of Apple. According to diminishing marginal rate of substitution, the rate of substitution of commodity X for Y decreases more and more with each successive substitution of X for Y.

On account of the indifference or neutrality of an individual consumer, these curves are also called indifference curves. Monotonic preference means that a rational consumer always prefers more of a commodity as it offers him a higher level of satisfaction. In simple words, monotonic preferences imply that as consumption increases total utility also increases. 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. Thus, an indifference curve is also known as ‘equal satisfaction curve’ or ‘iso-utility curve’.