Assumptions of indifference curve. Indifference curve 2019-01-22

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A Critical Evaluation of the Indifference Curve Analysis

assumptions of indifference curve

It has simply substituted new concepts and equations instead of the old ones. Significance of Indifference Curve Analysis: In indifference curve approach only ordination of preferences is needed. When indifference is the case, it must be true that the two bundles provide equal levels of satisfaction. The higher you go the greater the level of utility. One can also refer to each point on the indifference curve as rendering the same level of satisfaction for the consumer.

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Indifference Curve Analysis

assumptions of indifference curve

But a point like Y will surely be preferred to W, since Flies north-west of W: it contains more of both x 1 and x 2. The main use of indifference curves is in the of potentially observable patterns for individual consumers over commodity bundles. The cardinal utility approach, though very useful in studying elementary consumer behavior, is criticized for its unrealistic assumptions vehemently. Indifference curve analysis is basically an attempt to improve cardinal utility analysis principle of marginal utility. That means that all points on y have the same utility. The second assumtion states that if 'b' i s preferred to 'a' and 'a' is prefered to 'c' then it must be true that 'b' is preferred to 'c'.

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Indifference Curve Analysis

assumptions of indifference curve

The Marginal Rate of Substitution is the rate at which the consumer must sacrifice units of one commodity to obtain one more unit of another commodity. We know that consumers in actual world do not generally buy and consume one good. This means that an indifference curve is negatively sloped. Rationality The indifference curve analysis assumes that the human being under consideration is rational in decision-making. These two commodities are indivisible. On the other hand, he is willing to part with fewer and fewer units of commodity' Y' at each stage to obtain each additional unit of 'X'. .

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Indifference Curve

assumptions of indifference curve

In this case, he must not be in a position to prefer C to A since this decision becomes self-contradictory. Robertson blamed this analysis by pointing out it as an old wine in a new bottle. A collection of selected indifference curves, illustrated graphically, is referred to as an indifference map. We, therefore, conclude that indifference curves cannot cut each other. If the consumer prefers A to B and B to C, obviously, he must prefer A to C.

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Indifference Curve Analysis: Concept, Assumption and Properties

assumptions of indifference curve

So the consumer starts valuing y more in relative terms. For example, in the diagram below there are four indifference curves, each one representing a different set of indifference points relating to different levels of utility. If we move from A to A 2 the price of Y commodity decreases while reverse is the case. This would be a zeroslope line. He can conveniently arrange various combinations of two or more goods in ascending or descending order of preference. The cardinal approach provides the assumption of constant utility of money, which is unrealistic. It is also called as Ordinal Approach.

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What is Indifference Curve? definition, assumptions and illustratuon

assumptions of indifference curve

However, the market has many other commodities. We can see that when X1 amount of commodity X was consumed, Y1 amount of commodity Y was also consumed. This creates a positively sloped line. Budget line or price line is essential to know the equilibrium of an individual consumer. Rational consumers According to this theory, a consumer always behaves in a rational manner, i.

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Indifference Curves: Assumptions and Properties

assumptions of indifference curve

However, in marginal utility approach, we assume that goods under consideration do not have substitutes and complements. Thus, as we move along the curve from left downwards to the right, the absolute slope of the indifference curv … e decreases. In indifference curve,the consumer can say whether he prefer A to B or B to A or is indifference between them. The consumer is indifferent towards points a and b as they represent equal level of satisfaction. Here's how the indifference curve works. The locus of all commodity combinations from which the consumer derives the same level of satisfaction forms such a curve.

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Indifference Curve Analysis

assumptions of indifference curve

In the same way, any point in the lower south-west quadrant such as K is inferior to Y since Y dominates all points in it. Article shared by Indifference curve analysis is claimed to be superior to utility analysis because of its closeness to the reality. The Marginal Rate of Substitution is the rate at which the consumer must sacrifice units of one commodity to obtain one more unit of another commodity. Meaning and Definitions of Indifference Curves: A curve showing different combinations of two commodities giving the same level of satisfaction is called indifference curve. Moreover, the preferences of this consumer keep changing.


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Properties of Indifference Curves

assumptions of indifference curve

Now imagine a point at which they cross. Characteristics of Indifference Curves: Indifference curves have the following characteristics: 1 All the Combinations on an Indifference Curve Give Same Level of Satisfaction: As we defined, the indifference curve gives same level of satisfaction with different points or combinations of two commodities. Geometrical technique can study more than two goods and algebra has to be used which is complicated one. Higher indifference curves are preferred to lower ones, since more is preferred to less non-satiation. The indifference curve analysis measures utility ordinally.


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