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Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes

Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes

Karnataka Class 12 Commerce Economics Indifference Curve Analysis : Our team members provides Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes In PDF Format. Download and read well.

Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes

Karnataka Class 12 Commerce Economics Indifference Curve Analysis :  An indifference curve is a locus of combinations of goods which derive the same level of satisfaction, so that the consumer is indifferent to any of the combination he consumes.If a consumer equally prefers two product bundles, then the consumer is indifferent between the two bundles. The consumer gets the same level of satisfaction (utility) from either bundle. Graphically speaking, this is known as the indifference curve. An indifference curve shows combinations of goods between which a person is indifferent.

Symbolically,in the equation form,

An Indifference Curve =$U = f (x_1,x_2,x_3,…..x_n)= k$ ……where, k is a constant.

Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes

Karnataka Class 12 Commerce Economics Indifference Curve Analysis : The concept of indifference curve analysis was first propounded by British economist Francis Ysidro Edgeworth and was put into use by Italian economist Vilfredo Pareto during the early 20th century. However, it was brought into extensive use by economists J.R. Hicks and R.G.D Allen.
Hicks and Allen criticized Marshallian cardinal approach of utility and developed indifference curve theory of consumer’s demand. Thus, this theory is also known as ordinal approach.

Significance of Indifference Curve Analysis:

The cardinal approach provides the assumption of constant utility of money, which is unrealistic.In indifference curve approach, this assumption has been dropped.In indifference curve approach only ordination of preferences is needed.It overcomes the weakness of Cardinal measurement as the satisfaction cannot be measured objectively. Indifference curve approach is base for the measurement of ‘consumer’s surplus’.In a way it contributes to the Welfare economics. Indifference curve is a better tool to classify substitutes and complementary goods.

Indifference curve

An indifference curve is a locus of all combinations of two goods which yield the same level of satisfaction (utility) to the consumers.

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’.

On a graph, an indifference curve is a link between the combinations of quantities which the consumer regards to yield equal utility. Simply, an indifference curve is a graphical representation of indifference schedule.

The table given below is an example of indifference schedule and the graph that follows is the illustration of that schedule.

 Table: Indifference schedule Combination Mangoes Oranges A 1 14 B 2 9 C 3 6 D 4 4 E 5 2.5

Figure: Graphical representation of indifference curve Assumptions of indifference curve

The indifference curve theory is based on few assumptions. These assumptions are

Two commodities

It is assumed that the consumer has fixed amount of money, all of which is to be spent only on two goods. It is also assumed that prices of both the commodities are constant.

Non satiety

Satiety means saturation. And, indifference curve theory assumes that the consumer has not reached the point of satiety. It implies that the consumer still has the willingness to consume more of both the goods. The consumer always tends to move to a higher indifference curve seeking for higher satisfaction.

Ordinal utility

According to this theory, utility is a psychological phenomenon and thus it is unquantifiable. However, the theory assumes that a consumer can express utility in terms of rank. Consumer can rank his/her preferences on the basis of satisfaction yielded from each combination of goods.

Diminishing marginal rate of substitution

Marginal rate of substitution may be defined as the amount of a commodity that a consumer is willing to trade off for another commodity, as long as the second commodity provides same level of utility as the first one.

And, diminishing marginal rate of substitution states that the rate by which a person substitutes X for Y diminishes more and more with each successive substitution of X for Y.

As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin.

Rational consumers

According to this theory, a consumer always behaves in a rational manner, i.e. a consumer always aims to maximize his total satisfaction or total utility.

Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes

Karnataka Class 12 Commerce Economics Indifference Curve Analysis :  An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.

Description: Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The graph shows a combination of two goods that the consumer consumes.  The above diagram shows the U indifference curve showing bundles of goods A and B. To the consumer, bundle A and B are the same as both of them give him the equal satisfaction. In other words, point A gives as much utility as point B to the individual. The consumer will be satisfied at any point along the curve assuming that other things are constant.

Properties of Indifference Curves

The main attributes or properties or characteristics of indifference curves are as follows:

1) Indifference Curves are Negatively Sloped:

The indifference curves must slope downward from left to right. As the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction.

DIAGRAM:

In the above diagram, two combinations of commodity cooking oil and commodity wheat is shown by the points a and b on the same indifference curve. The consumer is indifferent towards points a and b as they represent equal level of satisfaction.

(2) Higher Indifference Curve Represents Higher Level of Satisfaction:

Indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction. The combination of goods which lies on a higher indifference curve will be preferred by a consumer to the combination which lies on a lower indifference curve.

Diagram:

In this diagram, there are three indifference curves, IC1, IC2 and IC3 which represents different levels of satisfaction. The indifference curve IC3 shows greater amount of satisfaction and it contains more of both goods than IC2 and IC1. IC3 > IC2> IC1.

(3) Indifference Curves are Convex to the Origin:

This is an important property of indifference curves. They are convex to the origin. As the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes as X for Y along an indifference curve. The Slope of the curve is referred as the Marginal Rate of Substitution. 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.

Diagram:

In the above diagram, as the consumer moves from A to B to C to D, the willingness to substitute good X for good Y diminishes. The slope of IC is negative.In the above diagram, diminishing MRSxy is depicted as the consumer is giving AF>BQ>CR units of Y for PB=QC=RD units of X. Thus indifference curve is steeper towards the Y axis and gradual towards the X axis. It is convex to the origin.

If the indifference curve is concave, MRSxy increases. It violets the fundamental feature of consumer behaviour.

If commodities are almost perfect substitutes then MRSxy remains constant. In such cases the indifference curve is a straight line at an angle of 45 degree with either axis.

If two commodities are perfect complements, the indifference curve will have a right angle.

In reality, commodities are not perfect substitutes or perfect complements to each other.Therefore MRSxy usually diminishes.

(4) Indifference Curves cannot Intersect Each Other:

The indifference curves cannot intersect 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. This is absurd and impossible.

Diagram:

In the above diagram, two indifference curves are showing cutting each other at point B. The combinations represented by points B and F given equal satisfaction to the consumer because both lie on the same indifference curve IC2. Similarly the combinations shows by points B and E on indifference curve IC1 give equal satisfaction top the consumer.

If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. It follows that the combination F will be equivalent to E in terms of satisfaction. This conclusion looks quite funny because combination F on IC2 contains more of good Y (wheat) than combination which gives more satisfaction to the consumer. We, therefore, conclude that indifference curves cannot cut each other.

(5) Indifference Curves do not Touch the Horizontal or Vertical Axis:

One of the basic assumptions of indifference curves is that the consumer purchases combinations of different commodities. He is not supposed to purchase only one commodity. In that case indifference curve will touch one axis. This violates the basic assumption of indifference curves.

Diagram:

In the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.

Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes

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