In micro economic theory, an
indifference curve is a graph showing different bundles of goods between which
a consumer is indifferent. That is, at each point on the curve, the consumer
has no preference for one bundle over another. One can equivalently refer to
each point on the indifference curve as rendering the same level of utility
(satisfaction) for the consumer. Utility is then a device to represent
preferences rather than something from which preferences come. The main use of
indifference curves is in the representation of potentially observable demand
patterns for individual consumers over commodity bundles.
There are infinitely many
indifference curves: one passes through each combination. A collection of
(selected) indifference curves, illustrated graphically, is referred to as an
indifference map.
A graph of indifference curves
for an individual consumer associated with different utility levels is called
an indifference map. Points yielding different utility levels are each
associated with distinct indifference curves and is like a contour line on a
topographical map. Each point on the curve represents the same elevation. If
you move "off" an indifference curve traveling in a northeast
direction (assuming positive marginal utility for the goods) you are
essentially climbing a mound of utility. The higher you go the greater the
level of utility. The non-satiation requirement means that you will never reach
the "top", or a "bliss point", a consumption bundle that is
preferred to all others
- Indifference curves are typically represented to be:
- Defined only in the non-negative quadrant of commodity quantities (i.e. the possibility of having negative quantities of any good is ignored).
- Negatively sloped. That is, as quantity consumed of one good (X) increases, total satisfaction would increase if not offset by a decrease in the quantity consumed of the other good (Y). Equivalently, satiation, such that more of either good (or both) is equally preferred to no increase, is excluded. (If utility U = f(x, y), U, in the third dimension, does not have a local maximum for any x and y values.) The negative slope of the indifference curve reflects the law of diminishing marginal utility. That is as more of a good is consumed total utility increases at a decreasing rate - additions to utility per unit consumption are successively smaller. Thus as you move down the indifference curve you are trading consumption of units of Y for additional units of X.
- Complete, such that all points on an indifference curve are ranked equally preferred and ranked either more or less preferred than every other point not on the curve. So, with (2), no two curves can intersect (otherwise non-satiation would be violated).
- Transitive with respect to points on distinct indifference curves. That is, if each point on I2 is (strictly) preferred to each point on I1, and each point on I3 is preferred to each point on I2, each point on I3 is preferred to each point on I1. A negative slope and transitivity exclude indifference curves crossing, since straight lines from the origin on both sides of where they crossed would give opposite and intransitive preference rankings.
- (Strictly) convex. Convex preferences imply that the indifference curves cannot be concave to the origin, i.e. they will either be straight lines or bulge toward the origin of the indifference curve. If the latter is the case, then as a consumer decreases consumption of one good in successive units, successively larger doses of the other good are required to keep satisfaction unchanged.
Application
To maximise utility, a household
should consume at (Qx, Qy). Assuming it does, a full demand schedule can be
deduced as the price of one good fluctuates.
Consumer theory uses indifference
curves and budget constraints to generate consumer demand curves. For a single
consumer, this is a relatively simple process. First, let one good be an
example market e.g., carrots, and let the other be a composite of all other
goods. Budget constraints give a straight line on the indifference map showing
all the possible distributions between the two goods; the point of maximum
utility is then the point at which an indifference curve is tangent to the
budget line (illustrated). This follows from common sense: if the market values
a good more than the household, the household will sell it; if the market
values a good less than the household, the household will buy it. The process
then continues until the market's and household's marginal rates of
substitution are equal. Now, if the price of carrots were to change, and the
price of all other goods were to remain constant, the gradient of the budget
line would also change, leading to a different point of tangency and a
different quantity demanded. These price / quantity combinations can then be
used to deduce a full demand curve. A line connecting all points of tangency
between the indifference curve and the budget constraint is called the
expansion path
So above is a brief overview of
IC and its application, for more information on this topic( or even on any of
the topics discussed in this blog) the reader is feel to contact at
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