To make sure you are not studying endlessly, EduRev has designed Commerce study material, with Structured Courses, Videos, & Test Series. Plus get personalized analysis, doubt solving and improvement plans to achieve a great score in Commerce. Various studies suggest that a majority of the consumption of goods takes place at the point where the consumer’s spending capacity meets the Indifference Curve. Any combination lying on Samaira’s Indifference Curve yields the same kind of satisfaction to her.
- It is a set of combination of two goods offering the same level of satisfaction to consumers.
- The above set shows that the consumer gets equal satisfaction by consuming all four combinations A, B, C and D of wheat and rice.
- And thus, the more preferable the indifference curve becomes.
- Or, as we are saying, indifference curves are concave outward, or convex with respect to the origin.
- Beyond point X, her indifference curve is flatter than the budget line—her marginal rate of substitution is lower than the absolute value of the slope of the budget line.
The Slope of the curve is referred because the Marginal Rate of Substitution. The Marginal Rate of Substitution is the rate at which the buyer should sacrifice units of 1 commodity to acquire yet one more unit of another commodity. If we then draw a line that separates the plus from the minus signs, we are going to acquire the indifference curve proven within the above determine. A higher indifference curve represents a higher level of satisfaction than a lower indifference curve. First, the indifference curve is sloping downward from left to right. Second, the indifference curve is strictly convex towards the origin.
Indifference curve must have negative slope
Note that the majority indifference curves are actually curves, so the slopes are altering as you progress along them. Most indifference curves are additionally often convex because as you eat more of 1 good you will eat less of the opposite. Having reached level X, Ms. Bain clearly wouldn’t hand over nonetheless more days of snowboarding for additional days of using. Beyond point X, her indifference curve is flatter than the budget line—her marginal rate of substitution is lower than the absolute value of the slope of the budget line.
To help make this clear, it is imperative to learn the fundamental properties of Indifference Curves that are clarified in the next section. As mentioned above, Samaira initially agreed to give up 6 units of books in exchange for an additional unit of food. From the table, you can observe that in subsequent combinations, the MRS is 2 and 1. Developed first by Francis Ysidro Edgeworth in his seminal 1881 book, the theory of Indifference Curves is a vital component of ordinal utility and consumer theory.
Download more important topics, notes, lectures and mock test series for Commerce Exam by signing up for free. It has been observed that an IC predominantly slopes downwards, to the right. This means that when the quantity of one product in combination with another is increased, the quantity of the other significantly decreases. Explain the conditions of consumer’s equilibrium under indifference curve approach. Indifference curves are graphs that represent various combinations of two commodities which an individual considers equally valuable.
In other words, when the different indifference curves or family of indifference curves are shown in a diagram, it is called indifference map. She is thus prepared to surrender 2 days of snowboarding for a second day of horseback using. The curve exhibits, nonetheless, that she would be keen to give up at most 1 day of snowboarding to acquire a 3rd day of horseback riding . The marginal rate of substitution is the rate at which a consumer is willing to substitute one commodity for another commodity.
Indifference CurveIn fig, X-axis shows the quantity of rice and Y-axis shows the quantity of wheat. The points A, B, C and D on the IC curve indicate those combinations of rice and wheat which yield equal satisfaction to the consumer. Indifference curves are not only negatively sloped, but are also convex to the origin. That implies that the rate at which she would be keen to trade snowboarding for horseback riding is lower than the market asks. She cannot make herself better off than she is at point X by further rearranging her consumption.
There are several analyses that have taken place for Indifference Curves that have deduced the fact as to how the income of a consumer can change their preferences. Practically, as their income increases, the curve goes higher as well. This means that the consumer can now afford a product that they could not have earlier. Thus the MRS of a product M for N is the quantity of N that can be compensated by an additional unit of M. Both situations yield the same level of satisfaction to the consumer in question.
Boards’ wise Solutions
Hence, it leads to a decrease in the supply of a good which shifts the supply curve towards the left, i.e. Marginal rate of substitution is the rate at which a consumer is willing to substitute one commodity for another commodity. 8.Explain the concept of ’Marginal Rate of Substitution’ with the help of a numerical example. Also, explain its behaviour along an indifference curve. 5.Monotonic Preferences Monotonic preference refers to a situation where the consumer will prefer more of commodities than the lesser quantity.
- Hence, point B represents more satisfaction than point B.
- In fig, IC2 is higher and IC1 is a lower indifference curve.
- As we know, all combinations of good A and good B that lie on the same indifference curve make the consumer equally happy.
- Also, explain its behaviour along an indifference curve.
- In English & in Hindi are available as part of our courses for Commerce.
This is due to the four properties of indifference curve economic assumption that “more is always better“. Just think about it, if someone were to ask you if you wanted a free slice of pizza or an entire pizza for free, what would you say? Now, of course it’s not always that simple, but in basic economic theory we can assume that consumers have a preference for larger quantities. The higher the indifference curves are, the larger the quantities of both goods. And thus, the more preferable the indifference curve becomes.
Browse extra Topics underneath Theory Of Consumer Behavior
The solution at Z includes a rise in the number of days Ms. Bain spends horseback using. Notice that only the value of horseback using has changed; all other options of the utility-maximizing answer stay the identical. Explain the three properties of indifference curves? The Question and answers have been prepared according to the Commerce exam syllabus. Information about Explain the three properties of indifference curves?
Used worldwide to predict and judge consumer behavior, the approach prefers the study of consumer preferences, instead of measuring them in terms of money. According to indifference law if a consumer is indifferent between bundle A and B, and bundle B and C, then he will be indifferent over bundle A and C too. State and explain the characteristics of indifference curves.
Virtually all indifference curves have a negative slope. If we assume that the individual likes both goods, the quantity of good B has to increase as the quantity of good A decreases, to keep the overall level of satisfaction the same. Because both axes each represent one of the two goods, this relationship results in a downward sloping curve.
Straight-line indifference curves of excellent substitutes are shown m Fig. Thus this method fails to deliver a constructive change in the utility analysis and merely provides new names to the previous concepts. Ms. Bain’s price range and the worth of skiing are unchanged; that is reflected in the truth that the vertical intercept of the budget line remains fastened. Ms. Bain’s preferences are unchanged; they are reflected by her indifference curves.
It is the functionality of an Indifference Curve that can be explained under many assumptions. It is known that each and every Indifference Curve has an origin. Another fact is that there are no intersections between any sorts of pairs of Indifference Curves. MRS is the rate at which the output of Good Y is sacrificed for every additional unit of Good X. Demand of a commodity is ability and desire to purchase a certain quantity of goods at a given price. Indifference curves slope negatively or slope downwards from the left to the right.
As he goes on obtaining more and more of X, MU of X starts declining so he will sacrifice less and less of good Y. Marginal Rate of Substitution refers to the rate at which the consumer is willing to sacrifice one good to obtain one more unit of the other good. Indifference map, higher the indifference curve, higher is the satisfaction and lower indifference curve shows the low satisfaction. IC1is lower indifference curve denoting lesser satisfaction. At a value of $50, she maximized utility at point X, spending three days horseback driving per semester. When the worth falls to $25, she maximizes utility at point Z, riding 4 days per semester.
Other Indifference Curve examples would include a teenager who might be indifferent between owning two band tee-shirts and one novel, or four novels and one band tee-shirt. As Samaira is faced with more such questions, an interesting scenario is observed. An inferior good is a type of good whose demand declines when income rises. Download the PDF Question Papers Free for off line practice and view the Solutions online. Downward sloping from left to right Convex to the origin. 4.Explain the meaning of Diminishing Marginal Rate of Substitution with the help of a numerical example.
The axes of those graphs represent one commodity each (e.g. good A and good B). 11.Explain the concept of Marginal Rate of Substitution by giving an example. What happens to MRS when consumer moves downward along the indifference curve? Indifference curves may or may not be parallel to each other. It depends upon the marginal rate of substitution of two curves on the indifference map. If the marginal rate of substitution of different points decreases at a constant rate, then curves are parallel to each other, otherwise, they are not parallel.
We can say that for every additional unit of a good, a consumer is willing to give up lesser and lesser amount of another good. In fig, the indifference curve touches Y axis at point M which implies that when the customer has OM quantity of money at which he doesn’t want any unit of rice. At point N, he is willing to buy OQ quantity of rice with OP units of money.
‘Indifference curves of imperfect substitutes are concave to the origin’ is not the basic property of indifference curves. Indifference curve is a curve showing different combinations of two goods, each combination offering the same level of satisfaction to the consumer. So that the consumer is indifferent, between all set of bundles. In other words, indifference set refers to the tabular representation of the combination of two goods giving the same utility or satisfaction to consumers. When this set is plotted on the graph, it will be known as the indifference curve.
Indifference map refers to a set of indifference curves corresponding to different income levels of the consumer. A higher indifference curve represents a higher level of satisfaction. If they touch the axis, it violates the basic assumption that the consumer purchases two commodities in a combination.