INDIFFERENCE CURVE

ANALYSIS

PRESENTED BY:
ANITA
AYUSHI GUPTA
 Contents:
 Ordinal Utility Approach
 Indifference Curves
 Indifference Map
 Assumptions of Indifference Curve
 Properties of Indifference Curve
 Limitations of Indifference Curve
 Comparison of Marginal utility analysis and indifference curve analysis
 Consumer Equilibrium by indifference curve
 Marginal rate of substitution
 Conditions of consumer equilibrium
Ordinal
OrdinalUtility
UtilityApproach
Approach
Cardinal Utility -
• Given by Marshall to define Consumer's Equilibrium.
•Measurement of satisfaction derived by the consumption of any
goods or services in terms of number and unit of that measurement
is Utils .
Ordinal Utility -
•Given by J.R. Hicks and R.G.D. Allen.
• Giving the rank to the utility derived by the consumption of goods
and services. This is more realistic and better than cardinal utility.  
INDIFFERENCE
CURVE
What
What is
is an
an Indifference
IndifferenceCurve?
Curve?

Locus of points representing all the

different combinations of two goods
which yield equal level of utility to the
consumer
 Indifference
IndifferenceCurve
Curve

12
A
10

8
Apples

B
6

4 C

2 D

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5
Oranges
What
What is
is an
an Indifference
Indifference
Schedule?
Schedule?
List of various combinations of
commodities which are equally
satisfactory to the consumer
concerned
 Indifference Schedule
Combination Oranges Apples MRS

A 1 10 1:10

B 2 6 1:4

C 3 3 1:3

D 4 1 1:2
INDIFFERENCE MAP
What
What is
is an
an Indifference
Indifference Map?
Map?
•Graph showing a whole set of indifference
curves

•It indicates the consumer’s preferences among

all combinations of goods and services.

•The farther from the origin the indifference

curve is, the more the combinations of goods
along that curve are preferred.
Assumptions
Assumptions :-:-

•Rationality
•Two commodities
•Ordinal Utility
•Non-satiety
•Transitivity of choice
•Diminishing Marginal Rate of Substitution
• Complete Knowledge
PROPERTIES OF
INDIFFERENCE
CURVE
1. An indifference
curve slopes
downwards
from left to the
right. The
indifference
curves are not
likely to be
vertical,
horizontal, or
upward
sloping.
 Units of Good Y

Good X
Units of
Units of Good Y

Good X
Units of
Good X Units of Good Y
Units of
2. An
indifference
curve is
convex to the
point of
origin.
 Indifference schedule

Combination Cigarette Coffee

A 1 12

B 2 8

C 3 5

D 4 3

E 5 2
3. Two
indifference
curves
never
intersect
each other.
Units of Good Y

Units of Good X
4. Higher
indifference
curves yield
higher
satisfaction.
5. Indifference
curves will
not touch
either axes.
6. Indifference
curves need not
be parallel to
each other
Limitations
Limitations :-:-

•Unrealistic Assumptions
•Complex Analysis
•Imaginary
•Ignores combinations involving risk
•Impractical
COMPARISON OF MARGINAL
UTILITY AND INDIFFERENCE
CURVE ANALYSIS
SIMILARITIES
SIMILARITIES :-:-

•Rationality of the consumer

•Diminishing marginal utility
•Identical equilibrium conditions
•Introspective Method
DIFFERENCES
DIFFERENCES :-:-

•Measurement of Utility
•Marginal Utility of money is not constant
•Greater insight into Price Effect
•Explanation of Giffen goods
•Assumption of independent utility given up
CONSUMER
EQUILIBRIUM BY
INDIFFERENCE
CURVE
CONSUMER
CONSUMER EQUILIBRIUM
EQUILIBRIUM

A consumer’s equilibrium is a situation when

a consumer maximise his satisfaction at a
given income and given prices.
Alternatively, this is the condition when the
consumer reaches the highest indifference
curve which is within his budget limit.
Marginal
Marginal Rate
Rate Of
Of Substitution
Substitution
(MRS)
(MRS)
• MRS refers to the rate at which the commodities can be
substituted with each other, so that the total satisfaction of the
consumer remains the same.
• For example: In the example of apples (A) and oranges (B), MRS
of A for B, will be number of units of B that the consumer is
willing to sacrifice for an additional unit of A, so as to maintain
same level of satisfaction.
• MRSAB= units of (B) willing to sacrifice\units of (A) willing to gain

• MRSAB is the rate at which a consumer is willing to give up

oranges for one more unit of apple.
Concept of MRSAB
Combinations Apples(A) Oranges(B) MRSAB

P 1 15 -
Q 2 10 5B:1A
R 3 6 4B:1A
S 4 3 3B:1A
T 5 1 2B:1A
Conditions of consumer
equilibrium

1. 2.
MRS=Ratio of MRS Continuously
Prices or Px\Py falls
Conditions of consumer’s
equilibrium:
MRSxy = Ratio of prices or
Px\ Py
 A. If MRSXY>PX\PY, it
means that the consumer
is willing to pay more for X
than the price prevailing in
the market. As a result,
MRS falls till it becomes
equal to the ratio of prices
& the equilibrium is
established.
B. If MRSxy<Px\Py, it
means that the consumer is
willing to pay less for X
than the price prevailing in
the market. It induces the
consumer to buys less of X
and more of Y.As a result,
MRS rises till it becomes
equal to the ratio of prices
and the equilibrium is
established.
MRS CONTINUOUSLY FALLS

The second condition for consumer’s

equilibrium is that MRS must be diminishing at
the point of equilibrium, i.e. the indifference
curve must be convex to the origin at the point
of equilibrium cannot be established.
THANK YOU