Properties of Indifference Curve and Budget Line Economics notes class11-12

 Properties of Indifference Curve:

There are four main properties of Indifference Curve, which are as follows :

    1. Downward sloping from left to right:  

              An Indifference Curve (IC)  slopes downward from left to right, i.e., it has a negative slope. 

     This property of IC is based on the assumption of Monotonic preferences and non-satiety.

    The human wants are never ever fully satisfied hence the consumer always prefers a combination which has more of both the goods or more of one good with no less of the other good (monotonic preferences).

    An IC represents a specific satisfaction level, thus when the consumption of one good is increased, consumption of other good has to be decreased to remain at the same level of satisfaction.

      Downward sloping means – if the consumer, consumes more of one commodity he must consume less quantity of other, then only he will have the same level of satisfaction from different combinations of the two commodities.

    This necessitates that an indifference curve must be negatively sloped. However, if the amount of food is increased and the amount of clothing remains the same, the consumer will prefer new combination to the initial one because the new combination will give him more utility. Therefore, these two combinations will not lie on the same indifference curve.

Downward sloping IC   

  2. Convex to Origin:  

       The indifference curve is convex to the origin. 

     The convexity of IC, implies that the slope of the indifference curve decreases as we move down the IC curve.

    This property is based on the assumption of Diminishing Marginal Rate of Substitution.

    As the consumption of good X is increased the consumer’s willingness to sacrifice Y for every additional unit of X falls.

    This happens because of application of  Law of Diminishing Marginal Utility.

   As the consumption of good X increase, Marginal Utility of X falls, the sacrifice of good Y results in rise of Marginal Utility of Y.

    A rational consumer will be willing to  sacrifice  lesser units of good with rising marginal utility (good Y)  for additional unit of a good whose marginal utility is falling  (good X) .

      3. Higher Indifference Curve represents higher satisfaction :

    An indifference curve which lies above another IC gives a higher level of satisfaction than the lower one.

    A combination on higher IC will give more satisfaction than a combination on the lower IC, since the former combination will have more amount of one commodity or other or more amount of both the commodities.

     This property is based on monotonic preference and non -satiety.

   All the combinations on a higher IC contain more amount of both the goods or more of one good with no less of the other ( monotonic preference).

    Hence any combination on a higher IC is capable of satisfying more number of wants than a combination on a lower IC. Thus higher IC  represents higher satisfaction.

   4. Two Indifference Curves neither touch each other nor intersect each other:

      Different indifference curves may lie close to each other, but they never intersect. 

    This property is based on the assumption of  transitivity of choice.

   Different ICs represent different level of satisfaction. Thus there can not be any common point between the two ICs.

    If the two ICs intersect each other, it means that a combination of two goods at the point of intersection would give two different levels of satisfaction, which is absurd, not possible. 

 On the given diagram B and E lie on IC2  the consumer is indifferent between the two. Also he is indifferent between F and B as the two lie on IC1.

     Thus, as per transitivity of choice consumer must be indifferent between E and F, but this is not possible as they lie on different ICs.

Question : what is Budget line ? Give its features.

Budget Line

     In order to find out what quantities of the two goods will be purchased by the household, we must also know how much expenditure the household wants to incur on these two commodities and what are the prices of the two commodities.

    While indifference curves tell us what choices the household would like to make, the budget line tells us what the household can do.

     Budget line represents all the combination of two goods that the consumer is able to purchase, given the prices  of  two goods and his money income, when the entire income is being spent.

Or

   A budget line shows various combinations of two commodities which can be purchased with a given budget at given prices of the two commodities.

   Features of Budget Line:

  1. Budget line is downward sloping :

        A budget line is a negatively sloping line or downward sloping line, as the consumption of one commodity is increased, the consumption of other commodity is decreased.

      If the consumer wants to purchase more amount of one commodity, he has to sacrifice some amount of the other commodity.

     Since, the consumer is assumed to spend his entire income to purchase more of one good. Thus he has to reduce the purchase of the other good and hence there is an  inverse relation.

 2. Budget line has a constant slope:

         The slope of the budget line depends on the prices of two commodities. 

      The slope of the budget line is equal to negative of the price ratio of two commodities. 

   Slope of budget line =  – Px / Py

  Where Px is the price of the commodity shown on the horizontal axis,and Py is the price of the commodity shown on the vertical axis.

   Since the price of the two goods are constant, the slope is also constant. 

    It also indicates that for every additional unit of one good, every time same quantity of other good has to be sacrificed.

       Budget line :

Image source Google

Assumption of the Budget Line

  A budget line is drawn on the assumption that :  

    1. Money income of the consumer is fixed,

    2. The prices of the two commodities are given.