Indifference Curve Analysis - Concept Of Indifference Curve - Learn Something New With BIKRAM ADHIKARI

 Meaning of Indifference Curve 

Indifference  curve  is  defined  as  the  locus  of  various  combinations  of  any  two  goods  which  yield  same  level  of  satisfaction  to  the  consumer.  In  other  words,  indifference  curve  is  that  curve  which  is  obtained  joining  the  points  each  representing  different  combinations  of  two  goods  yielding  same  level  of  utility  or satisfaction. Therefore, a consumer is indifferent between the combinations of goods  when  s/he  has  made  choice  between  them.  Indifference  curve  is  also  known   as   the   iso-utility   curve   and   equal   utility   curve.   The   concept   of   indifference  curve  was  first  invented  by  F.Y.  Edgeworth  in  1881.  Latter,  it  was  fully  developed  and  popularized  by  J.R.  Hicks  and  R.G.D.  Allen  in  1934.  It  is  the tool of ordinal utility approach of analysing consumer behaviour. 

According to A. Koutsoyiannis, "An indifference curve is the locus of points particular combinations  or  bundles  of  goods,  which  yield  same  utility  (level  of  satisfaction)  to  the  consumer, so that he is indifferent to the particular combination he consumes."In  the  words  of  Dominick  Salvatore,"An  indifference  curve  shows  the  various  combinations of two goods that give the consumer equal utility or satisfaction."Thus,  indifference  curve  is  the  locus  of  different  combinations  of  two  goods  which represent equal satisfaction or utility. 

Assumptions

The concept of indifference curve is based on the following assumptions:

The consumer is rational. 

Utility is ordinally measurable. 

The  marginal  rate  of  substitution  diminishes  when  one  commodity  is  substituted for another. 

The  consumer  does  not  reach  to  the  point  saturation  in  case  of  any  commodity. 

There is consistency and transitivity in choice. 

Indifference Map 

Indifference  map  is  defined  as  the  set  of  indifferent  curves.  In  other  words,  indifference map shows all the indifference curves which rank the preference of the  consumer.  Higher  indifference  curve  represents  higher  level  of  satisfaction  because  it  has  combinations  of  higher  quantities  of  both  goods  and  lower  indifference  curve  represents  lower  level  of  satisfaction  because  it  has  the  combination  of  lower  quantities  of  both  goods.  The  indifference  curve  far  from  the  origin  is  called  higher  indifference  curve  and  the  indifference  curve  near  to  the  origin  is  called  lower  indifference  curve. 

Properties of Indifference Curve 

The properties or features or characteristics of indifference curve are as follows: 

1.      Indifference   curve   is   negatively   sloped:  

 An   indifference   curve   has   negative  slope.  In  other  words,  indifference  curve  slopes  downward  from  left  to  right.  It  implies  that  if  quantity  of  one  commodity  decreases,  the  quantity of other must increase, if the consumer is to stay on the same level of satisfaction. 

2. Indifference curve is convex to the origin: 

The indifference curve is convex to the origin. This implies that the slope of indifference curve, i.e. marginal rate  of  substitution  (MRS)  decreases  as  we  move  along  the  curve  from  left  downward  to  the  right.  The  indifference  curve  is  convex  to  the  origin  because  of  diminishing  marginal  rate  of  substitution.  Marginal  rate  of  substitution  is  the  rate  at  which  one  commodity  is  substituted  for  another  so that total satisfaction remains same.

3.  Indifference  curves  do  not  intersect  with  each  other:  

Indifference  curves  do  not  intersect  to  each  other.  If  they  did,  the  point  of  their  intersection  would  imply  two  different  levels  of  satisfaction,  which  is  impossible.  In  other words, if indifference curves intersect with each other, it violates the assumptions of indifference curve. 

4.      Higher  indifference  curve  represents  higher  level  of  satisfaction:  

An  indifference  curve,  which  is  at  the  higher  level,  represents  higher  level  of  satisfaction  than  the  lower  one.  In  other  words,  the  further  away  from  the  origin   indifference   curve   lies,   the   higher   the   level   of   satisfaction   it   represents.  It  is  because  higher  level  indifference  curve  contains  larger  quantity of at least one or both commodities.

5.  Indifference  curve  never  touches  either  or  both  axes:  

Indifference  curvesdo  not  touch  either  or  both  axes.  

6.  Indifference  curves  need  not  to  be  parallel  to  each  other: 

 Indifference  curves need not to be parallel to each other. 

Exceptions of Indifference Curve 

If  marginal  rate  of  substitution  is  increasing,  then  the  indifference  curve  will be concave to the origin. 

If goods are perfect substitutes, the indifference curve will be straight line. 

If goods are perfect complementary, the indifference curve will be right angled