The consumer will value these combinations equally only if they give him more satisfaction than the other, he would surely prefer it to the other. It is assumed that he will spend the amount on both the goods and not save any part of it. Similarly, rate of decrease in consumption of coffee has gradually decreased even with constant increase in consumption of cigarette. The consumer cannot measure the absolute magnitude of satisfaction yielded by the various combinations of the two commodities. An indifference curve shows the same level of satisfaction. This is absurd and impossible. Thus, this theory is also known as ordinal approach.
Answer the question based on the table below showing the marginal utility schedules for product X and product Y for a hypothetical consumer. Most economic textbooks build upon indifference curves to introduce the optimal choice of goods for any consumer, based on that consumer's income. He may decide to buy biscuits only, in which case he can buy 50 biscuits. Through Online Tutoring, you would be able to complete your homework or assignments at your home. It means that the consumer must be consistent in his preferences. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for and assignment help services.
Assumptions of indifference curve analysis 1. This has to be the case because if the consumer is to remain at the same level of total satisfaction, he must get diminishing quantities of one commodity, if he is getting increasing quantity of the other. The consumer has a fixed amount of money to spend on the two goods. He is not only affected by economic variable but he is also affected by non-economic variables, namely, climatic condition, region, social custom, caste, language and region while taking the decisions. And not all of these assumptions are immediately obvious to us. As per indifference curve analysis, utility is not a measurable entity.
You would be happier with more puppies, but you would notbe happier with more air. It is a scale of preference. Latest technology based Economics Online Tutoring Assistance Tutors, at the , take pledge to provide full satisfaction and assurance in Theory of Consumer Behavior help via online tutoring. This means, any combination of two goods on the higher curve give higher level of satisfaction to the consumer than the combination of goods on the lower curve. The idea behind it is that if I offer you 3 apples and 2 bananas or 3 bananas and 2 apples, you might have a hard time deciding which offer is better. The modern theory of consumer behaviour is also known as the indifference curve approach. Allen provided a refined version of indifference curve approach.
Indifference curve is convex to the origin As mentioned previously, the concept of indifference curve is based on the properties of diminishing marginal rate of substitution. Price ratios of two goods and money income of a consumer are shown by a budget line or price line. If we move from A to A 2 the price of Y commodity decreases while reverse is the case. Thus, budget line or price line shows the various combinations of two commodities that can be purchased by the consumer with his given income. 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. All indifference curves are convex to the origin This is because of the operation of a principle known as 'Diminishing Marginal Rate of Substitution'. For example, if I have puppies andgarbage.
The exploration led them to come up with the ordinal utility approach or indifference curve analysis. Bundle Z has less of both and is clearly not equivalent. Also, we can say that when the problem of choice arises, the consumer ranks all such combinations of the same 2 goods at the same level. Thus, indifference curve is always convex neither concave nor straight. The consumer would like to choose a combination of good X and good Y, which will be on the highest indifference curve.
It can be seen from the Diagram 3. 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. He has order of preferences, namely, X, Y and Z goods. Therefore, he can slide up or slide down the indifference curve and choose any point on the curve. He has perfect knowledge of market conditions regarding the availability of goods and their prices. Therefore, no attempt is made to label an indifference curve by the amount of satisfaction it represents.
According to Hicks and Allen, utility cannot be measured. It can be explained with the help of the following table: The above table reveals that different combinations, namely, A, B, C, D, E, F of two commodities X and Y can be purchased by the consumer with his given income Rs. The indifference curves are based on this principle. The collection of data relating to scale of preferences of an individual consumer behaviour are not easily available and their collection is also very difficult. The fundamental condition of equilibrium is that the marginal rate of substitution of commodity X for commodity Y should be equal to the ratio of prices between the two goods. Whenever there is change in the price of a commodity the effects are divided into two categories, namely, income effect and substitution effect.
If we move from O to X we see that the price of X decreases and reverse is the case when we move towards O. It is unrealistic assumption which is not found in case of indifference curve analysis. One kind of economic good is placed on each axis. Thus, indifference curves cannot intersect each other. At this point, therefore the consumer is in equilibrium.