Indifference curve

The indifference curve is generally

associated with the name of two British
economist J.R.Hicks & R.G.D.Alen.
The indifference curve approach is
based upon the notion of Ordinal
Utility.
Meaning of indifference curve

Indifference curve is the locus of all

the combination of X & Y which give
the consumer equal satisfaction.
 IC

COMBINATIONS UNIT OF UNIT OF GOOD

GOOD`Y` `X`
A 64 1
B 48 2
C 36 3
D 25 4
E 15 5
F 8 6
 Marginal rate of substitution

 Marginal rate of substitution(MRS) is the basis of

indifference curve analysis.it indicates the rate at
which the commodities can be substituted at the
margin in such a manner that the total satisfaction
of the consumer remains unaltered.
 MRS of X for Y(MRSx,y) is defined as the amount
of Y the consumer is just willing to give up to get
an additional unit of X.
 Diminishing marginal rate of
substitution
 If we look at the shape of indifference
curve,we find that every time a consumer
gives up a unit of good ‘y’.he does not
require the same additional amount of good
‘x’ to compensate for the loss of satisfaction
rather,the consumer need to substitute
greater & greater amount of ‘x’ for each
additional unit of ‘y ’sacrificed.
 DMRS

Combinations Biscuit(Y) Tea(X) MRS

A 12 1 ---
B 8 2 4:1
C 5 3 3:1
D 3 4 2:1
E 2 5 1:1
 ASSUMPTIONS

 Non satiety
 Consistency
 Diminishing MRS.
 Two commodities
 Ordinal utility
 Rationality
 PROPERTIES

 They are downward slopping to the right.

 They are convex to the origin
 They do not intersect each other.
 A higher IC represents higher level of
satisfaction.
 An IC cannot touch either axis.
 IC are not necessarily parallel to each other
 1.Downward sloping to the
right
 Every IC slopes downward from left to right
This implies that if the consumer wants more
quantity of one good,he has to be satisfied
with lesser quantity of the other goods to
remain on the same IC.
 2.Convex to the origin

 IC’s are usually convex to the origin due to

marginal rate of substitution i.e it is the rate
at which the consumer is prepared to
exchange good X for Y or vice versa
 3.Two IC’s cannot intersect
each other

 Another property of IC is that they cannot

intersect i.e. two IC’s cannot pass through a
particular point because if this happens it
would lead to self-contradictory result.
 4.Higher IC represents higher
satisfaction

 This is only the interpretation of an

indifference curve map & should not be
treated as separate properties of IC.
 5.An IC cannot touch either
axis
 If IC touches either axis then this would
implies that consumer has only one
commodity & IC represents combination of
two goods.
 6.IC are not necessarily parallel
to each other
 This is true because the third property says
that they need not intersect each
other.however,there may be difference in the
slope of the two IC depending upon
differences in MRS of two curves.
 CONSUMER’S
EQUILIBRIUM
 A consumer will attempt to maximize his satisfaction
by reaching highest possible IC.
But he has to constraints by two things-
 He has to pay price for the goods.
 He has limited income.
What would be his feasible points,will depend upon
his income & the price of goods.
The line which explains feasibility is called PRICE
LINE or BUDGET LINE.
 Change in price line

 Due change in income

 Due to change in price of one commodity

 CONDITIONS FOR CONSUMER’S
EQUILIBRIUM

 A given line must be tangent to an IC or

MRS of X for Y (MRSxy) must be equal to
price ratio between the two goods.
 IC must be convex to the origin at the point
of tangency.
 INCOME EFFECT

 The effect of a change in consumer's income

On the purchase of a commodity is given by
INCOME EFFECT & the equilibrium points
of all possible level of income is known as
INCOME CONSUMPTION CURVE(ICC)
 COND……

 Zero income effect-(for those commodities

which consumer purchases in fixed
quantities-e.g-salt,ICC will be vertical
straight line)
 Negative income effect-(for inferior
commodities-e.g-maize, bajra )
 PRICE EFFECT

 Here the relative prices of the goods in

question change but there is no compensating
variation in income.The consumer’s real
income therefore either rises or falls.
 Cond…..

 The shape of the PCC depends on the amount spend

n commodity-
• PCC-downward sloping(consumer demands larger
quantity of X & smaller qty. of Y if price of X falls
• PCC-upward rising(qty demanded of X as well as Y
rises
• PCC-horizontal(qty demanded of X rises
proportionately & of Y remains the same)
 SUBSTITUTION EFFECT

 Substitution effect means the change in the

amount demanded of a commodity resulting
from a change in its relative price alone, real
income of the consumer remaining constant