Indifference Curve Analysis
or
Ordinal Utility Analysis :
Cardinal Utility :
Cardinal utility means that the utility that a consumer derive from a unit of commodity can be measured in absolute amount.
Ordinal Utility :
Indifference Curve Analysis is based on the idea of ordinal utility. Ordinal means ranking or ordering like first,second and third.
Ordinal utility implies that the consumer is capable of simply comparing the utility, derived from different goods or different units of same good.
Ordinal utility does not require that the consumer should be in a position to measure (in quantitative terms),the utility derived from different goods or different units of the same good or different combinations of goods. All that is necessary for the consumer to know is which goods or which combinations of goods give him the same utility, and which good or combinations of goods give more or less utility – how much more or less, that is not required.
The ordinal utility concept is relatively less restrictive than the cardinal utility concept. The indifference curve analysis is based on the idea of a given scale of Preference on the part of the consumer as between different combinations of two goods.
Question : What is an indifference curve ? What are the properties of an Indifference Curve ? Explain with the help of a diagram.
Question : Explain any two properties of the Indifference Curve with the help of a diagram.
Question : State the assumptions of indifference curve analysis.
Question: What is an indifference map ? Explain it with the help of a diagram.
Question : Why two indifference curves cannot intersect each other ?
Indifference Curve
Indifference Curve :
An indifference curve shows various combinations of two commodities which give equal amount of satisfaction to the consumer.
It is the locus of various points, each point representing a different combination of two goods, which yield the same level of satisfaction to the consumer so that he is indifferent between these combinations.
The consumer is indifferent as all these combinations give him same level of satisfaction.
The indifference curve is also known as Utility Curve.
Indifference Map:
Indifference map is the set or group of indifference curves, each representing a given satisfaction level.
Higher indifference curve represents higher satisfaction hence more preferred than the lower indifference curve.
If represents the preference scale of the consumer.
Indifference Schedule :
Combination |
cigarette (units) |
Coffee(units) |
Marginal Rate of Substitution |
A |
1 |
12 |
– |
B |
2 |
8 |
3 : 1 |
C |
3 |
5 |
2 : 1 |
D |
4 |
3 |
1 : 1 |
Indifference Map:
Explanation :
- A graph is plotted between quantity of X and quantity of Y Combination A, B ,C and D are plotted from Indifference Schedule.
- A curve which shows various combinations of two commodities which give equal satisfaction to the consumer IC, is obtained which is known as indifference Curve.
- The consumer may have many other combinations of commodities X and Y, which have same level of satisfaction but less than the satisfaction indicated by the indifference curve IC. This curve will lie below the curve IC.
- Similarly the consumer may have many other combinations of commodities X and Y which have same level of satisfaction but more than the level of satisfaction indicated by the Indifference curve IC. Thus the curve will lie above the curve IC.
- Each indifference curve will represents different level of satisfaction.
- All the points in each curve will give same level of satisfaction.
- The curve which shows higher satisfaction is obtained higher in graph.
- The curve with lower level of satisfaction is lower in the graph.
The concept of the marginal rate of substitution (MRS) is an
important tool of indifference curve analysis. In the analysis of consumer
behaviour, the marginal rate of substitution (MRS) is the rate at which a
consumer is willing to exchange one good for another.
In the case of two goods,
MRS answers the question, how much of one good would a consumer be willing to
give up getting one more unit of the other good. Thus, MRS is the amount of a
good that a consumer is ready to give up to obtain one additional unit of
another good to gain the same level of total utility.
It means the MRS of good
X for good Y is the maximum amount of good Y that a person is willing to
sacrifice to get one extra additional unit of good X.
concept of marginal rate
substitution (MRS) was familiarized by J.R. Hicks and Prof. R.G.D. Allen.
Marginal Rate of Substitution(MRS):
Marginal
Rate of Substitution (MRS) is the rate at which the consumer is willing to
substitute one good for another, without changing the level of
satisfaction.
Combination |
Good X |
Good Y |
MRSxy |
A |
1 |
12 |
– |
B |
2 |
8 |
3y : 1x |
C |
3 |
5 |
2 y : 1x |
D |
4 |
3 |
1y : 1x |
Determinants of Demand or the Factors Affecting Demand :