Economics
presentation
Zeba Tahsin Ahmed , XI HUM A
AGENDA
AN ECONIMCS
CONCEPT :
INDIFFRENCE
CURVE
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Introduction
What is indifference curve ?
Indifference curve refers to the graphical representation o various
alternative combinations of bundles of two goods among which the
customer is indifferent.
An indifference curve is also know as ‘equal satisfaction curve’ or ‘ iso-
utility curve’
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Let us now understand the concept
of indifference curve with the help
of the following schedule :
.
Properties of indifference curve :
1. INDIFFERENCE CURVES ARE CONVEX TO THE ORIGIN:
Indifference curves are not only negatively sloped, but are also convex
to the origin. The convexity of the indifference curves implies that not
only two commodities are substitutes for each other but also the fact
that the marginal rate of substitution (MRS) between the goods
decreases as a consumer moves along an indifference curve.
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2.INDIFFERENCE CURVE CANNOT
INTERSECT: .
• IC1 is lower indifference curve denoting lesser satisfaction.
Combination C and B fall on IC1.
• IC2 is upper indifference curve denoting higher satisfaction
• C and A combinations are on IC2 At the point of intersection, C
= B on IC1 and C = A on IC2. So A = B
whereas, A is in upper IC and B is on lower IC. This is not possible.
.
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.
. INDIFFERENCE CURVES DO NOT TOUCH
3.
THE HORIZONTAL OR VERTICAL AXIS:
f they touch the axis, it violates the basic assumption that the
consumer purchases two commodities in a combination.
.
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4. Every Indifference Curve to the right
represents Higher Level of Satisfaction
than that of the Proceeding One:
Let us take two Indifference Curves IC1 and IC2 lying to the right of IC1. At the point P the
consumer gets OM of oranges and ON of bananas. At the point Q though the number of
bananas remains the same i.e., ON, yet the number of oranges increases from OM to OM1. The
total satisfaction of the consumer is therefore bound to be greater at Q than at P.
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Assumptions of the
indifference curve :
1. Rationality.
The consumer assumes to be rational. So the
consumer aims to maximize utility by consuming
commodities, given his income and prices of goods.
2. Utility is ordinal.
The utility is ordinal means that consumers
can rank or order the various baskets of
commodities based on each basket’s
satisfaction or utility.
. 3. The diminishing marginal rate of
substitution:
Indifference curve analysis is based
on the axiom of diminishing marginal
rate of substitution. Suppose that a
consumer consumes two
commodities, say X and Y. From a
combination of the commodities, he
gets a certain level of utility or
satisfaction.
