Indifference Curves in Economics: What Do They Explain?

For example, at income b1, the individual is indifferent to 4x + 7y. Atb2, the individual is indifferent to 8x (more of x) and 17y (more of y). It would be illogical to be indifferent to 4x + 7y, and 8x and 4y. If bundle latexA/latex represents more of at least one good and no less of any other good than bundle latexB/latex, then latexA/latex is preferred to latexB/latex.

If you insert point B so that it lies a little to right of the original point A, then the substitution effect will exceed the income effect. If you insert point B so that it lies a little to the left of point A, then the income effect will exceed the substitution effect. The income effect is the movement from C to B, showing how choices shifted as a result of the decline in buying power and the movement between two levels of utility, with relative prices remaining the same.

In other words, an infinite number of indifference curves are not drawn on this diagram—but you should remember that they exist. Thus, Lilly’s preferences will include an infinite number of indifference curves lying nestled together on the diagram—even though only three of the indifference curves, representing three levels of utility, appear in Figure 1. An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer.

( A Higher Indifference Curve Represents a Higher Level of Satisfaction:

Each indifference curve on that graph shows one satisfaction level all along the curve. In other words, the representation of consumer preferences by a number of indifference curves is known as an indifference map. An indifference map represents every possible indifference curve that the consumer has, which helps in ranking their preferences.

Chapter 4: Elasticity of Demand

Along with the budget line are shown the three indifference curves from Figure B1. An indifference curve is a graphical representation that shows various combinations of two goods or commodities that provide the same level of satisfaction or utility to an individual. The two combinations of commodity Rice and commodity beans are shown by the points (a) and (b) on the same indifference curve. The consumer is indifferent towards points (a) and (b) as they represent an equal level of satisfaction.

1. In this article, we discussed the definition, assumptions, and properties of the indifference curve.
2. The substitution effect of a wage increase is to choose more income, since it is cheaper to earn, and less leisure, since its opportunity cost has increased.
3. A process of analyzing a simple two-dimensional graph representing two goods, one on the x-axis and the other on the y-axis is known as an Indifference Curve Analysis.
4. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.
5. The income effect is that the higher wage, by shifting the labor-leisure budget constraint to the right, makes it possible for Petunia to reach a higher level of utility.
6. Bundle latexB/latex also represents more of both goods than bundle latexD/latex, and therefore latexB/latex should be preferred to latexD/latex.
7. BundlelatexA/latex in figure 1.7 contains five teaspoons of each type of salt.

Since we can’t consume everything our hearts desire, we have to make choices, and those choices are based on our preferences. Choosing based on likes and dislikes does not mean that we are selfish—our preferences may include charitable giving and the happiness of others. Some disregard the concept claiming that a concave indifference curve is even possible theoretically. In the practical scenario, the preference of a consumer keeps on changing, which makes this concept vague. If you are finding it a little tricky to sketch diagrams that show substitution and income effects so that the points of tangency all come out correctly, it may be useful to follow this procedure.

Like many aspects of contemporary economics, indifference curves have been criticized for oversimplifying or making unrealistic assumptions about human behavior. Each indifference curve is typically convex to the origin and no two indifference curves ever intersect. Consumers are always assumed to be more satisfied when they’re achieving bundles of goods on indifference curves that are farther from the origin. Some economists argue that the concept of indifference is hypothetical and therefore incompatible with real-life economic actions taken by consumers. People’s relative preferences have been found to change over time and depending on their social context. As used in biology, the indifference curve is a model for how animals ‘decide’ whether to perform a particular behavior, based on changes in two variables which can increase in intensity, one along the x-axis and the other along the y-axis.

What is Indifference Set?

Indifference curves visually depict this tradeoff by showing which quantities of two goods provide the same utility to a consumer. Consumer preferences might change between two points in time, rendering specific indifference curves practically useless. Other critics note that it’s theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points.

What determines exchange rates?

The indifference curve is based on the assumption that a consumer considers different possible combinations of two goods and wants both goods. If an indifference curve touches either of the axes, it would mean that a consumer is consuming the whole of one good only, which is not possible and contradicts the assumption. Therefore, an indifference curve never touches either of the axes. Therefore, a higher indifference curve means a higher level of satisfaction.

Utility-Maximizing with Indifference Curves

Fischel (1995)15 however, raises the counterpoint that using WTA as a measure of value would deter the development of a nation’s infrastructure and economic growth. An indifference curve is a downward sloping convex line connecting the quantity of one good consumed with the amount of another good consumed. Irish-born British economist Francis Ysidro Edgeworth first proposed this two-dimensional graph, also known as the iso-utility curve. We can then isolate the price consumption line for the single product, as shown.This tracks how demand will change in response to changes inprice, and from this we can derive a demand curve. If we now combine the data for indifference curve map, and the budget line, we can calculate when the consumer is in equilibrium.

In the curve, the quantity consumed by B2 will compensate for the increase in the amount consumed by B2. As it can be seen in the above image, to attain an additional unit of Good X, i.e., to move from 1 unit to 2 units, the consumer has to sacrifice some units of Good Y, i.e., 3 units (from 10 units to 7 units). For many, what are the properties of indifference curve the Giffen good remains a mathematical curiosity,but it is clear that in low income countries, with a singlestaple diet, supplemented occasionally with more expensivefoods, a rise in the price of the staple might well see a risein demand. Price consumption lines can be used to illustrate the idea of price elasticity of demand.The two price consumption lines show an elastic and inelastic demand. We can also identify the income consumption line for a single product, as shown.The income consumption line track the effect of changes inincome on demand, and from this we can derive anEngel curve.

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2. So,the income effect (which increases demand) outweighs thesubstitution effect (which reduces demand).
3. Clearly, the assumption that more is preferred to less only relates to a beneficial ‘good’, rather than a harmful one.
4. Please note that the questions and answers contained on our website are for study purposes only and should not be treated as the exact questions to expect in your examination.
5. The answers to these questions are critical when choosing among the policy alternatives.
6. More generally, for any point on a lower indifference curve, like Ul, you can identify a point on a higher indifference curve like Um or Uh that has a higher consumption of both goods.
7. When a curve intersects the budget limit of an individual consumer, it creates an optimal consumption bundle.

For example, the x-axis may measure the quantity of food available while the y-axis measures the risk involved in obtaining it. The indifference curve is drawn to predict the animal’s behavior at various levels of risk and food availability. This assumption states that consumers are consistent in how they make their choices. Hence, if I prefer tea to coffee today, then – unless something related to the choice changes – I willalso prefer tea to coffee tomorrow. Drawing indifference curves for perfect substitutes is straightforward, as shown in figure 1.7. Figure 1.6 illustrates the process of drawing indifference curves for perfect complements.