A given price line should be tangent to an indifference curve or marginal rate of satisfaction of good x for good y mrs xy must be equal to the price ratio of the two goods. Mar 16, 2016 ordinal theory is also known as neoclassical theory of consumer equilibrium, hicksian theory of consumer behavior, indifference curve theory, optimal choice theory. Since more is better, an indifference curve cannot have a positive slope. At the same time the inventors and supporters of new method contend that their analysis is based on fewer and more reasonable assumptions. Since all the combinations give the same amount of satisfaction, the consumer prefers them equally. It is clear that when a consumer gets one more banana, he has to forego some mangoes, so that her total utility level remains the same and she remains on the same indifference curve. All the points such as a, b, c and d lying on an indifference curve provide the consumer with the same level of satisfaction. The assumptions of this theory are less stringent than for the cardinal utility approach. The uses or application of indifference curve analysis. Indifference curve analysis graph and example study notes.
In console b of figure, we plot p 1 against x 1 which is the first point on the demand curve for x1. The indifference curve is so named because the consumer would. Points offering more utility are located above and to the right of. Consumer theory is concerned with how a rational consumer would make consump. Indifference curves and the ordinalist revolution archive ouverte. Higher indifference curve higher level of satisfaction lower indifference curve lower level of satisfaction 3. Lecture notes for fall 2009 introductory microeconomics brown university. Although only three indifference curves are shown in figure 7.
School of economics quaideazam university, islamabad definition. Thus the basis of indifference curve approach is the preference indifference hypothesis. Indifference curve, budget line and consumer equilibrium. According to the indifference curve approach, it is not possible for the consumer to say how much utility he derives from the consumption of a commodity, because utility is not a measurable magnitude. In microeconomics, the indifference curve analysis is an important analytical tool in the study of consumer behaviour. This approach also explains the consumer s equilibrium who is confronted with the multiple objectives and scarcity of money income. Indifference curve the curve showing the various combinations of two commodities that give the consumer equal level of total utility. The goal of the theory of preferences is for the consumer to be able to rank these commodity.
To explain indifference curves, we consider an imaginary consumer, jan burger. The starting point of the economic analysis of peoples objectives is the idea of preferences. On the indifference curve the consumer is indifferent, i. The remainder of these notes provides a simple mathematical exposition of this analy. Cardinal utility analysis assumes that level of utility can be expressed in numbers. Consumers tastes can be related to utility concepts or indifference curves. The indifference curves analysis has been a major advance in the field of consumer s demand. An indifference curve defines the substitution between goods x and y that is acceptable in the mind of the consumer. An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Theory of consumer behaviour unit 5consumer equilibrium.
Consumer s equilibrium through indifference curves. The properties of these indifference curves reflect the four consumer preference. Allen in their research paper, a reconsideration of the theory of value. Nov 12, 2019 the indifference curve analysis retains some of the assumptions of the cardinal theory, rejects others and formulates its own.
It is presumed that the axioms of rational choice are in effect. Indifference curve slopes downward, consumers prefer more goods to fewer goods. Consumer theory jonathan levin and paul milgrom october 2004 1 the consumer problem consumer theory is concerned with how a rational consumer would make consumption decisions. Consumer equilibrium marginal utility and indifference. The indifference curves approach requires less information than the neoclassical cardinal utility theory.
Theory of consumer behaviouindiffernce curve 35 properties of indifference curve indifference curves are always convex to the origin. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. For utility measurement, the cardinal utility theory is a quantitative method while the ordinal utility theory is a qualitative method. Theory of consumer behaviour 1 30 questions mcq test. Consumers equilibrium by indifference curve analysis. Aug 14, 2015 indifference curve analysis part 2 part 3 part 4 a very popular, easier and scientific method of explaining consumer s demand is the indifference curve analysis. In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. Draw the indifference curves for the following individuals preferences for two goods. The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Only ordinality of preferences is required, and the assumption of constant utility of money has been dropped. The understanding of the concept of budget line is essential for knowing the theory of consumer s equilibrium. The indifference curve approach is used in the theory. These axioms are completeness, transitivity and continuity.
Both hicks and slutsky use the indifference curve s to produce their own theories on consumer behaviour. Individual preferences are modelled using indifference curves and a distance function where the preferences of individuals are affected by their poverty status. Any utility function that satisfies axioms 1 3 cannot have indifference curves that cross. Explain consumers equilibrium with the help of indifference. A indifference set or indifference curve contains the bundles that provide the same level of satisfaction or welfare for a given individual. 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. Indifference map is a collection of several indifference curves. Human satisfaction is psychological phenomenon which cannot be measured in terms of monetary terms. It has also provided the basis for the construction of index numbers of the cost of living and their use for judging changes in consumer welfare in situations where.
Theory of consumer choice, consumer preference theory another useful technique for considering how consumers choose between alternative satisfaction is indifference curve analysis. According to this approach u a is a cardinal number, that is. An indifference curve, with respect to two commodities, is a graph showing those combinations of the two commodities that leave the consumer equally well off or equally satisfiedhence. Dec 02, 2011 it is the demand curve that shows relationship between price of a good and its quantity demanded. Revealed preference approach to consumers behaviour. The theory can prove the existence and convexity of the indifference curves under the axiom assumption than the cardinal utility and ordinal indifference curve approaches.
An indifference curve is a curve that represents all the combinations of goods that give the same satisfaction to the consumer. In this section we are going to derive the consumer s demand curve from the price consumption curve. According to the indifference curve approach, it is not possible for the. Preferences of the consumer theory, law, and indifference curve. This approach to consumer demand theory, which focuses. Indifference curves map or graphically represent consumer preferences. Applications of indifference curve approach microeconomics. The indifference curve method seeks to derive all rules and laws about consumers demand that are derivable from the cardinal utility analysis. The point of maximum satisfaction is achieved by studying indifference map and budget line together. The contribution of hicks and slutsky to understand consumer.
According to it when a consumer is presented with a number of various combinations of goods, he can order or rank them in scale of preferences. Indifference curve analysis of consumers equilibrium. Two indifference curves can never intersect each other. Marginal rate of consumer substitution mrcs absolute slope of the indifference curve may be different at every point along the curve. Consumers equilibrium through indifference curve analysis. If the quantity of one good is reduced, the quantity of the other good must increase. Chapter 1 microeconomics of consumer theory sanjay k. An important difference between the mar ginal utility approach and the indifference approach is that the indifference approach. The negative slope of the indifference curve reflects the assumption of the monotonicity of consumer s preferences, which generates monotonically increasing utility functions, and the assumption of nonsatiation marginal utility for all goods is always positive. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. Use of indifference curves in international trade uses the indifference technique so effectively that the basic theorems and proofs of the theory of inter national. For this technique we build a pattern of indifference curves, each recording a chain of choices between alternatives which give equal satisfaction. The indifference curve analysis was developed by the british economist francis ysidro edgeworth, italian economist vilfredo pareto and others in the first part of the 20th century. When one arrives at two options that are indifferent to the individual, these two points that represent them are on the same indifference.
The graph shows a combination of two goods that the consumer consumes. Mrs tends to diminish as the ic is convex to the origin. The collection of indifference curves for a consumer constitutes a kind of map illustrating a consumer. In this chapter the indifference approach is used, which is an alternative to the marginal utility approach which is usually encoun tered in introductory microeconomic courses. Budget sets, utility functions, and indifference curves page 26. High ic represents a high level of satisfaction than the lower one. In general, there is an indifference curve through any point in xy space.
Notice that the indifference curves of this utility function are convex. Graphically, the indifference curve is drawn as a downward sloping convex to the origin. Thus the consumer s equilibrium under the indifference curve theory must meet the following two conditions. A method of constructing community indifference curves. This approach also explains the consumer s equilibrium who is confronted with the multiplicity of objectives and scarcity of money income. But a consumer can compare two or more combinations of goods and say which of them he likes best or whether he likes. Professor robertson does not find anything new in the. An indifference curve shows combination of goods between which a person is indifferent. Though attempts have been made to quantity indifference curve but success is very limited. This is a detailed and an elucidated information about the concept deriving a demand curve from indifference curves and budget constraints. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data. The assumptions of the ordinal theory are the following.
When 2 goods are perfect substitutes, indifference curve will be a straight line on which mrs is constant. An indifference curve is a locus of all combinations of two goods which yield the same level of satisfaction utility to the consumers. Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. Practice questions about consumer theory question 1. This approach to consumer behaviour is based on consumer preferences. This theory of the consumer has given us many tools.
We begin the study of the economic behavior of the consumer by examining tastes. We assume also that consumers i and ii have each indifference maps. But still it requires a lot from the consumer, since the theory expects him to be able to rank rationally and consistently all possible collections of commodities. Indifference curves 510 slope of indifference curves.
On an indifference map, higher indifference curve represents a higher level of satisfaction than any lower indifference. In order to describe the consumers problem we need to specify his. The indifference curve analysis is a graph showing the different combinations of two goods that report the same satisfaction to a person, and are preferred to other combinations. A consumer is willing to give up one good only if he or she gets more of the other good in order to remain equally happy. With the help of indifference curve technique the problem of exchange. Both marginal utility, as well as total utility, are measured in utils. Indifference curve approach, as presented by hicksallen is the basic tool of ordinal analysis of demand. Doc criticisms of indifference curve analysis antony.
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