Theory Of Topic - Indifference Curve
An indifference curve is a curve which shows relationship between the quantities of two goods, say Good X and Good Y, along which a consumer is indifferent. It means along the curve, a consumer does not mind choosing any set of quantities of Good X and Good Y and will remain indifferent.
To better explain it, let us consider an example. If the two points fall along the indifference curve say one being 10 units of X and 12 units of Y and the other being 5 units of X and 16 units of Y, the consumer will not mind choosing any set of these two quantities. This happens because any of the sets offer the same level of utility to the consumer. It means that the sum total of utility obtained from each set remains the same.
Utility is simply a measure of satisfaction obtained from the usage of goods and services. It is the quantitative measurement of the satisfaction received after using a good or service. For example, a consumer who likes to drink milk would receive a higher utility after drinking milk compared to that consumer who just drinks milk because it has proteins and he does not like the taste of it. Utility is a very relative concept.
The Indifference curve represents a series of the combinations between Good X and Good Y. Indifference curve works on the basis of the ordinal utility approach. It does not consider utility as numbers. It considers consumer preferences and satisfaction priority to determine the sum total of utility. In simple words, it works on the principles of ranks. It is used to find Consumer Equilibrium.
An Indifference map is a collection of Indifference curves which shows different combinations of Good X and Good Y that a consumer can possible have. The higher Indifference curve shows a higher level of satisfaction due to the concept of monotonic preferences which means that the rational consumer that good more over the other which gives him or her higher level of utility.
An important concept while studying the indifference curve is the Marginal Rate of Substitution. As the term explains, it shows the rate at which commodities can be substituted with each other in such a way that the consumer satisfaction remains the same.
It is calculated as under:
Marginal Rate of Substitution between Good X and Good Y = Unit of Y willing to sacrifice/Units of X willing to gain.
Or, it can also be shown as:
Marginal Rate of Substitution between Good X and Good Y = Marginal change in Y/Marginal Change in X
Another important concept is the law of diminishing marginal utility which states that the utility gained from substituting one product over the other, keeps diminishing with an increase in consumption. So he is willing to give up less of one good to gain the other.
A few important characteristics of the indifference curve:
- Indifference curves are convex to the origin.
- Indifference curves never intersect each other.
- The higher indifference curves show higher utility.
- Indifference curves are downward sloping.
Problems Encountered In Solutions To Indifference Curve Problems
Indifference curve as explain above have many concepts and formulas intertwined within its definition. Consumer equilibrium is very objective and keeps changing with a change in their preferences. Their satisfaction levels and patterns may keep differing making indifference curve a difficult concept to understand. The properties of Indifference curve needs to be kept in mind to understand the concept of Indifference curve better.
The drawing of indifference curve and indifference maps can be difficult and complicated. A small error in mapping the point can lead to the construction of the indifference curve from the start. The Marginal Rate of substitution has to be calculated carefully. Also, the law of diminishing utility needs to be checked for as it always holds true which helps students in checking if their solution is going in the right direction. It is used to calculate consumer equilibrium which can be quite confusing and difficult to calculate. Even after calculating, the analysis for it is tedious and requires too many efforts. These factors make the indifference curve problems very challenging.
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