Indifference Curve
Indifference Curve
Indifference Curve
2.Marginal rate of substitution, MUx/MUy, or the ratio at which a household is willing to substitute Y for X. As you consume more of X and less of Y, X becomes less valuable in units of Y
3. Consumer have the ability to choose among the combination of goods and services available. 4. Consumer choices are consistent with a simple postulate of rationality. if A consumer prefer A to B and B to C , then when confronted consumer will prefer A to C as well.
In fig. 3.4 the 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.
A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and combination on a lower indifference curve yields a lower satisfaction.
In this diagram (3.5) 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).
This is an important property of indifference curves. They are convex to the origin (bowed inward) because of marginal rate of substitution, shows the rate at which consumers are willing to give up one good in exchange for more of the other good.
rate of substitution the rate at which one good must be added when the other is taken away in order to keep the individual indifferent between the two combinations.
Marginal Law
of diminishing marginal rate of substitution as you get more and more of a good, if some of that good is taken away, then the marginal addition of another good you need to keep you on your indifference curve gets less and less.
Given the definition of indifference curve and the assumptions behind it, 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.
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.
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