Indifference Curve
The indifference curve is supposed to be a very important tool to analyze utility. They are used to represent an ordinal measurement of the tastes and preferences of the consumer and also to show how the consumer maximizes utility in spending income.
It is defined as a graph showing a combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.
Assumptions
1. Only two goods are taken into consideration. It is assumed that the customer has to make a choice between two goods, provided their prices remain constant.
2. It is assumed that the consumer has non-satisfy nature with both the commodities and look for more benefits from these two, to have a higher curve to have more satisfaction.
3. The satisfaction level cannot be measured; thus, the customer ranks his preferences.
4. It is assumed that the marginal rate of substitution diminishes, as more units of one good have to be set off by the reduction in the units of the other commodity. Thus, the indifference curve is convex to the origin.
5. It is assumed that the consumer is rational and will make his choice objectively to have increased utility and satisfaction.
6. There is an operation of the law of diminishing marginal rate of substitution.
7. It is also assumed that consumer’s choices are characterized by transitivity i.e. A> B, B>C, then A>C.
8. The total utility of the consumer depends upon the quantities of the commodities consumed.
Indifference schedule (Preference schedule)
An indifference schedule may be defined as a schedule of various combinations of the two commodities that will equally be acceptable to the consumer. A consumer possesses a definite scale of preferences for goods and services. Each scale of preference includes a number of alternative combinations of two or more goods, which gives the consumer the same amount of satisfaction.
We can construct an indifference curve from an indifference schedule in the same way we construct a demand curve from a demand schedule.
| Combinations | Oranges | Apples |
|
A |
1 |
12 |
|
B |
2 |
8 |
| C | 3 |
5 |
| D | 4 |
3 |
| E | 5 |
2 |
By plotting the above indifference schedule in the graph, we can derive the indifference curve as shown below.
On the graph, the locus of all combinations of commodities oranges and apples forms an indifference curve. Movement along the indifference curve gives various combinations of commodities oranges and apples; however, it yields the same level of satisfaction. It is also known as the iso utility curve (“iso” means the same). A set of indifference curves is known as an indifference map.
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