In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. Since all the combinations give the same amount of satisfaction, the consumer prefers them equally. An indifference curve represents a series of combinations between two different economic goods, between which an individual would be theoretically indifferent regardless of. In figure 1, indifference curve ul can be thought of as a low level of utility, while um is a medium level of utility and uh is a high level of utility. Theory of ordinal utilityindifference curve analysis.
Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. It is like a contour map showing the height of the land above sealevel where instead of height, each indifference curve represents a level of satisfaction. It implies that the consumer is capable of simply comparing different levels of satisfaction. Application in the theory of exchange and a few others. An alternative approach to understanding consumer choice learning objectives. After reading this summary, youll have a clear understanding on the theory of consumer behavior, i will also introduce you to the concept of the indifference curve, budget lines, and consumer equilibrium. Indifference curve approach free download as powerpoint presentation. Marshalls demand analysis is based on the cardinal measurement of utility. Another useful technique for considering how consumers choose between alternative satisfaction is indifference curve analysis. Consumer behaviour the indifference approach introduction the utility approach to the analysis of consumer behaviour, which usually forms part of an introductory course in microeconomics, is based on the assumption that a consumer can assign values to. The consumer always tends to move to a higher indifference curve seeking for higher satisfaction. The importance of the role of consumers is apparent from the fact that in south africa about 60 per cent of all goods and services is purchased by consumers.
Pdf modern microeconomic theory is based on a foundation of ordinal preference relations. By a consumer we mean a person who has the opportunity to buy. In this video, arizona state universitys professor joana girante will show you how to graph an indifference curve. He introduced a tool of analysis called indifference curve to analyze the consumer behavior. This approach also explains the consumer s equilibrium who is confronted with the multiple objectives and scarcity of money income. The indifference curve analysis approach was first introduced by slustsky, a. Developed by the irishborn british economist francis y. Building a better understanding of individuals tastes and. When a consumer consumes various goods and services, then there are some combinations, which give him exactly the same total satisfaction. A given price line should be tangent to an indifference curve or marginal rate of satisfaction of good x for good y mrs xy must be equal to the price ratio of the two goods.
It is also useful for the analysis of consumer choices in the face of uncertainty, which is presented in chapter 6. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. Indifference curve approach is free from all the criticism levelled against cardinal approach or. Explain utility maximization using the concepts of indifference curves and budget lines. Thus the consumers equilibrium under the indifference curve theory must meet the following two conditions. An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. An indifference map shows all the indifference curves which rank the preferences of the. The indifference approach microeconomics studies the behaviour of the individual decision making units in the economy, of which the consumer is one of the most important. Consumer preference theory a notion of utility function b axioms of consumer preference c monotone transformations 2. The indifference curve i 1, is the locus of the points l, m, n and p showing the combinations of the two goods x and y between which the consumer is indifferent. An indifference curve is a graph that shows a combination of two goods that give a consumer equal satisfaction and utility, thereby making the consumer indifferent. Understanding consumer s equilibrium by indifference curve analysis.
Consumers equilibrium through indifference curve analysis. Formally, the equation u x, y u o defines an indifference curve for the reference utility u 0. Browse more topics under theory of consumer behavior. An indifference curve shows all the various combinations of two goods that give an equal amount of satisfaction to a consumer. If a consumers indifference curve intersects the budget line, then it will always be possible for the consumer to make exchanges along the. An alternative approach to understanding consumer choice, section 7. Theory of choice a solving the consumers problem ingredients characteristics of the solution interior vs corner. Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget. Indifference curves 510 slope of indifference curves. All of the choices on indifference curve uh are preferred to all of the choices on indifference curve um, which in turn are preferred to all of the choices on ul. The assumptions of this theory are less stringent than for the cardinal utility approach.
An indifference curve is the locus of points particular combinations or bundles of goodswhich yield the same utility level of satisfaction to the consumer, so that he is indifferent as to the particular combination he consumes. Consumer theory uses indifference curves and budget constraints to generate consumer demand curves. According to the supporters of the indifference curves theory, utility is a psychic entity and it cannot therefore be measured in quantitative cardinal terms. An indifference curve shows all of the amounts of goods that give the consumer the same level of satisfaction. And, indifference curve theory assumes that the consumer has not reached the point of satiety. Axioms of consumer preference and the theory of choice author. Vilfred pareto, wicksteed and slutsky developed this approach. Though cardinal utility theory is marshalls brilliant analysis of consumers behavior, the indifference curve theory or ordinal utility theory outweighs the former because it is a more realistic way to analyze consumers economic behavior. Theory of consumer behaviour assumes that you can only order or arrange your preference in order of priority, you cannot quantify the level of your satisfaction. In this section we are going to derive the consumers demand curve from the price consumption curve. The indifference curve shows the different combinations of two goods that give equal satisfaction and utility to the consumers. The indifference curve approach managerial economics. Edgeworth, it is widely used as an analytical tool in the study of consumer. Before we proceed to determine the consumers equilibrium through this approach, let us understand some useful concepts related to indifference curve analysis.
An alternative approach to understanding consumer choice learning objectives 1. Economists use the vocabulary of maximizing utility to describe consumer choice. The term consumers equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market the aim of the consumer is to get maximum satisfaction from his money income. It is a curve that represents all the combinations of goods that give the same satisfaction to the consumer. In this article we will discuss about the applications of indifference curve approach. How is indifference curve analysis superior to marshallian. Marginal rate of consumer substitution mrcs absolute slope of the indifference curve may be different at every point along the curve. An indifference curve represents a series of combinations between two different economic goods, between which an individual. In this lecture, we will learn about utility, how to define it and how we represent it mathematically. Such a diagram is known as an indifference map where each indifference curve corresponds to a different indifference schedule of the consumer. Jun, 2017 in this video, arizona state universitys professor joana girante will show you how to graph an indifference curve. Doc criticisms of indifference curve analysis antony.
Introduction to indifference curves and budget lines. Explain the notion of the marginal rate of substitution and how it relates to. Applications of indifference curve approach microeconomics. Or in other words, all the combinations lying on a consumers indifference curve are equally desirable or preferable to him. In this section we are going to derive the consumer s demand curve from the price consumption curve. Lecture 3 axioms of consumer preference and the theory of. As indifference curve theory is based on the concept of diminishing marginal rate of substitution, an indifference curve is convex to the origin. Consumer behaviour the indifference approach introduction the utility approach to the analysis of consumer behaviour, which usually forms part of an introductory course in microeconomics, is based on the assumption that a consumer can assign values to the amount of satisfaction utility that he. Characteristics demand theory states that consumers derive utility not from the actual contents of the basket but from the characteristics of the goods in it. Scribd is the worlds largest social reading and publishing site. Differentiating in such a way as to preserve the equality, we obtain the slope of the indifference curve. It is the demand curve that shows relationship between price of a good and its quantity demanded. Mar 16, 2016 ordinal theory is also known as neoclassical theory of consumer equilibrium, hicksian theory of consumer behavior, indifference curve theory, optimal choice theory. Axioms of consumer preference and the theory of choice.
So far in the text, we have described the level of utility that a person receives in numerical terms. Understanding consumers equilibrium by indifference curve. Theory of consumer choice, consumer preference theory. An indifference curve refers to the locus of points each showing different combinations of two substitutes which yield the same level of satisfaction and utility to the consumer.
Indifference curve, in economics, graph showing various combinations of two things usually consumer goods that yield equal satisfaction or utility to an individual. The amount of y that the consumer is willing to give up, in order to obtain an extra bit of x, is the slope of the indifference curve. The indifferencecurves analysis has been a major advance in the field of consumer s demand. This approach also explains the consumers equilibrium who is confronted with the multiple objectives and scarcity of money income. Here is an example to understand the indifference curve better. The point of maximum satisfaction is achieved by studying indifference map and budget line together.
Ordinal theory is also known as neoclassical theory of consumer equilibrium, hicksian theory of consumer behavior, indifference curve theory, optimal choice theory. Consumer behaviour theory of consumer behaviour hs. The fundamental approach of indifference curve analysis is that it has abandoned the concept of cardinal utility and instead has adopted the concept of ordinal utility. Only ordinality of preferences is required, and the assumption of constant utility of money has been dropped. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. One of the major difficulties in studying this area is that it is impossible to predict human behavior. If the various combinations are plotted on a diagram and are joined by lines, this becomes an indifference curve, as i in the figure 1. This section presents an alternative approach to describing personal preferences, called indifference curve analysis, which avoids the need for using numbers to measure utility. This theory was developed by kelvin lancaster in 1966 in his working paper a new approach to consumer theory. All consumers make decisions to maximize their utility. Note that the priceoffer curve is the locus of tangencies between indifference curves and budget lines that pivot about one point on the vertical axis, in this case 0,4. An indifference curve is an implicit function that has the amounts of goods as variables. According to it when a consumer is presented with a number of various combinations of goods, he can order or rank them in scale of preferences.
The term consumer s equilibrium refers to the amount of goods and services which the consumer may buy in the market given his income and given prices of goods in the market the aim of the consumer is to get maximum satisfaction from his money income. A popular alternative to the marginal utility analysis of demand is the indifference curve analysis. This approach assigns an order to consumer preferences rather than measure them in terms of money. In other words, the indifference curve is the graphical representation of different combinations of goods generally two, for which the consumers are indifferent, in terms of the overall satisfaction and the utility. Lecture 3 axioms of consumer preference and the theory. For consumers, their decisions are driven, quite simply, by what they want. Rational consumers according to this theory, a consumer always behaves in a rational manner, i.
This is based on consumer preference and believes that we cannot quantitatively measure human satisfaction in monetary terms. The indifference curve indicates the various combinations of two goods which yield equal satisfaction to the consumer. In 1939,hicks reproduced the indifference curve theory in his book value and capital. As one moves out along the offer curve, one is identifyi ng quantities demanded of g ood 1 as its price falls. Indifference curve adopted the concept of ordinal utility instead of cardinal utility. An alternative approach to understanding consumer choice learning objectives explain utility maximization using the concepts of indifference curves and budget lines.
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