Further, you could ascertain that a consumer is in equilibrium when he obtains maximum satisfaction from his expenditure on the commodities given the limited resources. The pcc obtained by joining optimal consumption combinations such as e, and e 1, in figure. The indifference curve analysis measures utility ordinally. Indifference curvesintroductionthe origins of indifference analysis can be traced back to the work of late 19th century irish economist francis edgeworth, and later, to italian economist vilfredo pareto. Straightline indifference curves of perfect substitutes are shown m fig.
Bain prefers all the combinations on indifference curve b to those on curve a, and she regards each of the combinations on indifference curve c as inferior to those on curves a and b. 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. Indifference curves and consumer equilibrium economics. In the new equilibrium position, the consumer purchases only ox 2 units of giffen good x and oy 2 units of good y. A higher indifference curve shows a higher level of satisfaction than a lower one. A line will connect all possible combinations of good a and good b that show the same level of utility. Indifference curve analysis the utility analysis suffers from a defect of subjective nature of utility i. 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. An indifferent curve is drawn from the indifference schedule of the consumer. This is the point of consumer equilibrium, where the consumer purchases om. Question concerning budget line and indifference curve. Indifference curves are widely used in microeconomics to analyze consumer preferences. We then introduce the budget line and combine it with indifference curves to explain consumer equilibrium.
The absolute value of the slope of the budget line gives the price ratio between the two. On the other hand, an indifference curve depicts various combinations of two goods that provides a consumer with the same level of satisfaction. Indifference curves are graphs that represent various combinations of two commodities which an individual considers equally valuable. The indifference curve i 1 is the locus of the points l, m, n, p, q, and r, showing the combinations of the two goods x and y between which the consumer is indifferent. Measure the quantity of hot dogs on the vertical axis and the quantity of hamburgers on the horizontal axis.
But he can reach a higher indifference curve i 2 by choosing basket q t shown by point b in figure 2. Here we will take the opportunity to use the two good model to specifically focus on the effects of the price change of one good, by considering good x on the horizontal axis and aog or. I am sure i can figure out the consumption bundle that maximizes his satisfaction and indifference curve, but i have trouble finding the equation of the budget line. The axes of those graphs represent one commodity each e. An indifference curve is a locus of all combinations of two goods which yield the same level of satisfaction utility to the consumers. Indifference set it is set of combination of two commodities which offer a consumer the same level of satisfaction. Indifference curves and budget lines economics help. The budget line is tangent to indifference curve ic 2 at point e. Indifference curves and the ordinalist revolution archive ouverte. How to derive consumers equilibrium through the technique of. The individual will be indifferent between all combinations of x and y indicated by the curve and will prefer all combinations above the. Read this article to learn about indifference curves. The specific shape and function of the demand curve then depends on the utility functionindifference curve. Many students find it easiest to first select the tangency point c where the original indifference curve touches the dashed line, and then to draw the original indifference curve through a and c.
Using figure 4, explain why the point of tangency of the budget line with an indifference curve is the consumers equilibrium position. Draw indifference curve passing through the four commodity bundles. An indifference curve shows all the bundles that the consumer sees as equally desirable. Budget lines and indifference curves consumer preferences step 2 preferences dont explain all results budget constraints budget constraintsbc limit an individuals ability to consume in light of the prices they must pay and their income the bc reflects what is possible to do the budget line the budget line. Draw an imaginary budget line bl3 parallel to the new budget line bl2 and make it tangent to the initial indifference curve ic1, we get the tangent point c. Similarly all the combinations lying on indifference curve ii provide the same satisfaction but the level of satisfaction on indifference curve ii will be greater than the level of satisfaction on indifference curve i likewise, all higher indifference curves, iii, iv and v represent progressively higher and. A line that shows the combinations of goods that can be purchased at the. The consumer can, therefore, continue to purchase q 0, thus remaining on the initial indifference curve i 1.
Introduction to indifference curves and budget lines. The locus of these points of tangency subject to variation in the price p is the priceconsumption curve, from which the demand curve is derived. An indifference curve is normally drawn as convex to the origin this reflects the assumption of the law of diminishing marginal satisfaction marginal utility i. The curve obtained by joining optimal consumption combinations such as e 1, e and e 2 is called the price consumption curve pcc. Budget lines and indifference curves notes budget lines. Understanding consumers equilibrium by indifference curve.
The point of maximum satisfaction is achieved by studying indifference map and budget line together. A consumers budget constraint identifies the combinations of good and. Application of indifference curve analysis changes in. Bains new indifference curve at point d also intersects her budget line. Pdf the thesis of this paper is that when the indifference curve is concave to the origin, the optimal point on the budget line is not the corner. The starting point for indifference analysis is to identify possible baskets of goods and services which yield the same utility usefulness, or satisfaction to consumers. Jun 01, 2014 at point e, consumers equilibrium is attained. Indifference curvesbudget lines a c b d e income 100 income 140 income 124 utility 714 utility 892 q2 q1 economics 101 spring 2001 section 4 hallam exam 2a blue for questions 16 consider the diagram below. Aug 22, 2014 11 indifference curve danindifference curve dan budget linebudget line approachapproach slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising.
Indi erence curves, budget lines, and demand curves. Optimal choice when faced with a budget constraint involves moving to an indifference curve that is tangential to the budget line but if the prices a good changes, it will change the budget line. 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. In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. Characteristics of indifference curves flashcards quizlet. Indifference curves and marginal rate of substitution video khan. At the optimum, the indifference curve is tangent to the budget constraint so their slopes are equal. An indifference curve is a curve that shows all combination of a good that provide the same level of utility budget line represents all the combination of good and services that a consumer may purchase given current price within his given inc.
If a consumers indifference curve intersects the budget line, then it will always be possible for the consumer to make exchanges along the budget line that move to a higher indifference curve. But the points that lie both below and above this budget line also have significance. Dec 16, 2010 indifference curves and utility maximization indifference curve a curve that shows combinations of goods which gives the same level of satisfaction to the slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Free indifference curve analysis online practice tests. Indifference curves budget lines a c b d e income 100 income 140 income 124 utility 714 utility 892 q2 q1 economics 101 spring 2001 section 4 hallam exam 2a blue for questions 16 consider the diagram below. Although only three indifference curves are shown in figure 7. Budget lines and indifference curves notes budget lines and. An indifference curve is a line showing all the combinations of two goods which give a consumer equal utility.
Also assume that indifference curves have their normal shape, that is, the mrs becomes flatter as you move along the x axis for any indifference curve. This is followed by an investigation of the effects of. Indifference curves an indifference curve is a line that shows combinations of goods among which a consumer is indifferent. Demand curves of individuals are aggregated to yield a marketdemand curve. The same method of construction can be used to show a utility map. Indifference curves is the curve that represents the bundle of goods which give consumer the same level of satisfaction, hence the word indifference because consumer do not gain or lose utility or satisfaction if they move along the curve from one point to another.
Meaning an indifference curve is a graphical presentation of locus of all such points which shows different combinations of two commodities which gives equal satisfaction to the consumer. Jan 18, 2012 c is the optimal choice when faced with the budget constraint given here, as it is the indifference curve that is tangential to the budget constraint. It shows the maximum possible amounts that can be spent on the two goods. Choose from 254 different sets of characteristics of indifference curves flashcards on quizlet. Microeconomics assignment help, example on indifference curves and budget lines, since 1990, real income has increased rapidly, yet the average number of children per family has decline. This point was above the initial budget line, and hence beyond the. With the constraint of budget line, the highest indifference curve, which a consumer can reach, is ic 2. This line is called an isoutility iso is greek and means the same or equal line or, more commonly, an indifference curve. Explain why any point where the budget line intersects an indifference curve is not equilibrium.
Therefore, a consumer in his attempt to maximise his satisfaction will try to reach the highest possible indifference curve. Indifference curve analysis income and substitution effects inferior duration. Every point on an indi erence curves represents one bundle of products e. How to derive consumers equilibrium through the technique. Indifference curve analysis part 2 10 questions 804 attempts economics, consumption, indifference curves, indifference map, marginal rate of substitution, properties of indifference curves, price line and consumers equilibrium, economics ap, microeconomics ap, ap microeconomics, ap economics, indifference curve analysis part 2 contributed by. The indifference curve shows the different combinations of two goods that give equal satisfaction and utility to the consumers. Explicitly plot the points on the budget constraint. Three possible explanations for this process are given below. We now describe in brief as to how indifference curves and budget lines can be used to analysis the effects on consumption due to a changes in the income of a consumer b changes in the price of a commodity. Indi erence curves are graphically represented below. An alternative approach to understanding consumer choice, section 7. Microeconomicsindifference curves and budget lines. The point of tangency between the budget line and indifference curve is at 20x and 15y. This means that at point c, the slope of the indifference curve, or the marginal rate of substitution, is equal to the slope of the budget line.
Indifference curves and utility maximization indifference curve a curve that shows combinations of goods which gives the same level of satisfaction to the slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. The knowledge of the concept of budget line is essential for understanding the theory of consumers equilibrium. It has to be a line consisting of points, otherwise it violates the principle of monotonicity more is better, since youd be saying you are indifferent between two. You can analyze consumers equilibrium through the technique of indifference curve and budget line.
Try your hand at these budget line and indifference curve. Indifference curves are drawn based on the consumers presumed indifference. An indifference curve shows combinations of goods and services between which a consumer is indifferent. Understanding consumers equilibrium by indifference curve analysis. The individual is indi erent between every bundle on the indi erence curve. This point was above the initial budget line, and hence beyond the reach of the consumer given y 0 and p 0. Third, the indifference curve technique is an extremely useful tool which can be used to. This is the main theme of the theory of consumer behavior. The consumer is in equilibrium at point e where the budget line ab is a tangent to the indifference curve ic 2.
Now, draw the original indifference curve, so that it is tangent to both point a on the original budget line and to a point c on the dashed line. In simple model this is usually represented by two goods. Indifference curves are plotted on a graph according to a system of equations, and according to investopedia, standard indifference curve analysis operates on a simple twodimensional graph. The individual will be indifferent between all combinations of x and y indicated by the curve and will prefer all combinations above the indifference curve to any combination on the curve. The income applicable to a marketdemand curve where the relevant market is the. What happen to budget line if the price of y goes up. The tangency of indifference curve ic 2 and the price line represent the above statement. The highest indifference curve possible for a given budget line is tangent to the line. Dec 20, 2017 indifference curve analysis income and substitution effects inferior duration. The basic difference between budget line and indifference curve is on the basis of affordability. The derivation of demand curves from indifference curves. The better substitutes the two goods are for each other, the closer the indifference curve approaches to the straightline so that when the two goods are perfect substitutes, the indifference curve is a straight line. It shows that the consumer successively moves on a higher indifference curve and becomes better off, with increase in herhis income.
Lillys budget constraint, given the prices of books and doughnuts and her income, is shown by the straight line. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say x and y. Thus, the tradeoff between the goods that the individual is willing to undertake mrs. An indifference curve is a line showing all of the consumption bundles that. An indifference curve represents a series of combinations between two different economic goods, between which an individual. While budget line takes into account the affordability of the goods for the consumer. Learn characteristics of indifference curves with free interactive flashcards. What is the difference between a budget line and an.
Because the indifference curve ic 2 is the best possible indifference curve that the consumer can reach with the given resources budget line. Microeconomicsindifference curves and budget lines wikiversity. The specific shape and function of the demand curve then depends on the utility function indifference curve. Utility function, indifference curve, marginal rate of substitution, perfect substitute, perfect complements. Geoff riley frsa has been teaching economics for over thirty years. Ordinal approach indifference curve characteristics budget line equilibrium of consumer. The feasible set is the set of all affordable consumption bundles. How to draw demand curve given the indifference curve and the. When is an indifference curve tangent to the budget line. Point c xc, yc has the same utility level as point a, which means xcyc 18. Similarly all the combinations lying on indifference curve ii provide the same satisfaction but the level of satisfaction on indifference curve ii will be greater than the level of satisfaction on indifference curve i likewise, all higher indifference curves, iii, iv and v represent progressively higher and higher levels satisfaction. In other words, the indifference curve is the graphical representation of different combinations of goods generally two, for which the consumers are indifferent, in terms of the overall satisfaction and the utility. It shows that the consumer successively moves on a higher indifference curve and becomes better off, with a fall in the price of good x p x. Also we know point c is jacks optimal consumption choice given bl3, so we have the.
The absolute value of the slope of the indifference curve shows the mrs between two goods. The icc obtained by joining optimal consumption combinations such as e, and e 1, in figure. How to draw demand curve given the indifference curve and. If we then draw a line that separates the plus from the minus signs, we will obtain the indifference curve shown in the above figure.
Ordinal approach indifference curve characteristics. Indifference curves and consumer equilibrium consumer equilibrium is reached at the point of tangency between the budget line and the highestattainable indifference curve. If the various combinations are plotted on a diagram and are joined by a line this becomes an indifference curve, as i 1 in the figure 12. An indifference curve represents a series of combinations between two different economic goods, between which an individual would be theoretically indifferent regardless of. Indifferent because the combinations yield same total utility. Understanding indifference curves and how to plot them. Four properties of indifference curves quickonomics.
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