Description about Indifference curve analysis. Hope it is helpful to the readers! Comment and suggestions are welcome.

1. Indifference
Curve
Analysis
by:
Manisha Joshi

2. Indifference Curve
Indifference Curve is a
locus of all such points
which shows different
combination of two
commodities which yield
equal satisfaction to the
consumer, so that he is
indifferent to the
particular combination he
consumes.

3. Indifference Curve schedule
It refers to a schedule that indicates different
combinations of two commodities which yield equal
satisfaction.
Table 1. Indifference Curve schedule
Combination Apples Oranges
of
apple s and
oranges
A 1 10
B 2 7
C 3 5
D 4 4

4. Indifference
Map refers to a
set of
Indifference
Curve.

5. Assumptions of
Indifference Curve Analysis:
a) Consumer is rational.
b) Utility can be measured in Ordinal numbers.
c) Marginal rate of substitution (MRS)
diminishes.
d) Consumer does not reach the level of
satiety, he offers more quantity of a good to
less quantity.

6. e) Consumer’s behavior is Consistent.
E.g. if consumer prefers A combination > B combination
at one time, then at another time he will not prefer
more of B combination than A combination.
f) Transitivity.
E.g. if consumer prefers A combination to B
combination and B combination to C combination, then
he will definitely prefer A combination to C
combination.
g) Consumer’s scale of Preference is Independent of his
income and prices of goods in the market.

8. 1) An Indiffeqence
ctqve ulopeu
dosnsaqd.
An IC curve slopes
downward from left
to right or it has a
negative slope.

9. IC curve may be a
a) Vertical
line

10. b) Horizontal line

11. c) Upward sloping
curve

12. 2) Convex vo vhe
poinv of Oqigin
It implies that IC slope
tends to decrease as we
move along it from left to
right.
Since,
slope of IC is same as MRS,
we can say that Convexity of
IC implies diminishing MRS.
This is possible in case of
Normal goods only.

13. If an Indifference Curve is not Convex to point of
Origin ‘O’ then it can be
o A straight line
It signifies that
MRS of Apples for
Oranges remains
Constant. Such an
Indifference Curve
can be possible in
case of Perfect
Substitutes.

14. o Concave
It signifies that MRS
of Apples for Oranges
is increasing. It means
that as the quantity of
Apples is increasing its
importance is also
increasing, but it does
not happen in real life.

15. Each IC represents
different level of
satisfaction, so
their intersection is
ruled out.

16. From figure:
lC1 shows that
satisfaction from = satisfaction from
A combination B combination
lC2 shows that
satisfaction from = satisfaction from
A combination C combination ;
It implies
satisfaction from is equal to satisfaction from
B combination C combination
(3 oranges+ 2 apples) (2 oranges+2 apples) ,
but it is not possible as quantity of oranges in B combination is
more than in C combination, though quantity of apples in both
combinations are equal.

17. 4
In Indifference Map,
higher IC represents
those combinations
which yield more
satisfaction than the
combinations on the
lower IC.

18. In IC analysis, it is assumed that a consumer buys
combination of different quantities of two
commodities. Hence, Indifference Curve touches
neither X-axis nor Y-axis.
In case an indifference curve touches either
X-axis or Y-axis, it means that consumer wants
only one commodity and his demand for second
commodity is zero.

19. An indifference curve
may touch OY-axis, if it
represents money
instead of a commodity.

20. Indifference Curves may or
may not be parallel to each
other. It all depends on the
MRS of two curves.
Indifference Curves will be
parallel to each other only
when MRS of different
points on two curves
diminishes at constant rate,
otherwise they will not be
parallel.

21. If consumer wants a combination of more
than two commodities, say three
commodities then such a combination cannot
be expressed in the form of diagram.

23. 1) Straight line
indifference curve :
In case of Perfect
Substitutes, IC may be
a straight line with
negative slope.
e.g. Taj Mahal (X-
commodity) and Brooke
Bond tea (Y-commodity)
are perfect substitute
of each other.
Here,
MRSxy = 1

24. 2) Right-angled
Indifference Curve :
In case of Perfectly
Complementary goods,
the shape of IC is
right-Angle.
e.g. a consumer will buy
right and left shoes in a
fixed ratio.
Here,
MRSxy = 0

26. The Budget line shows all different combinations of
the two commodities that a consumer can purchase
given his money income and price of two commodities.
Slope of Price line = Px/Py
Here;
Px= price of apples
Py = price of oranges

27. Suppose ; a consumer has
Income = Rs. 4 to be spent on apples and oranges.
Price of apple = Rs. 1.00
Price of oranges = Rs. 0.50
the different combinations that a consumer can get of
these goods are :

28. From Figure;
Budget line = AB
r If there is any point
outside or to the right of
price line AB, the
consumer will not be able
to buy that combination
of two goods because of
his limited income.
r If there is any point
inside or to the left of
price line AB, then the
consumer will be unable
to spend all his income.

29. 1) Due to change in
Income:
Assumptions :
o price of two goods
remain constant and
o income of consumer
changes.
Change in Effect on
Income Price Line
Rise Shift to Right
Fall Shift to Left

30. 2) Due to change in the
Price of one
commodity:
Assumptions:
O Income of consumer
remain unchanged.
O Price of one
commodity is constant.
O Price of other
commodity changes.

32. Consumer’s equilibrium refers to a situation in
which a consumer with given income and given
prices purchases such a combination of goods
and services which gives him maximum
satisfaction and he is not willing to make any
change in it.
It is struck when
“what he is willing to buy coincides with what
he can buy”

33. O Prices of goods are constant.
O Consumer’s income is also constant.
O Consumer knows the prices of all things.
O Consumer can spend his income in small
quantities.
O Consumer is rational.
O Consumer is fully aware of Indifference
map.
O Perfect competition in the market.

34. 1) Price line should be tangent to Indifference Curve.
or
Slope of IC = Slope of Price line
or
MRSxy = Px/Py
2) Indifference Curve must be Convex to the Origin.

35. When the consumer is in
equilibrium, his highest
attainable Indifference
Curve is tangent to price
line.
From Figure:
At point ‘D’, slope of
Indifference Curve and Price
Line coincide. Therefore,
first condition of consumer’s
equilibrium is satisfied.

36. It means that MRS of Apples
for Oranges should be
diminishing.
If at the point of equilibrium,
Indifference Curve is Concave
and not Convex to the Origin,
then it will not be a position of
permanent equilibrium.
Therefore, a consumer will be in
permanent equilibrium where
both the conditions are
satisfied.

37. It is the rate at which the consumer is willing to
give up commodity Y for one more unit of
commodity X in order to maintain the same level of
satisfaction.
Utility gained of Good X = Utility lost of Good Y
It is estimated as
MRSxy = ΔY/ΔX
on any point on IC.

38. According to this Law, “as a consumer gets more
and more units of X, he will be willing to give up
less and less units of Y.”
In other words, the marginal rate of substitution
of X for Y will go on diminishing while the level of
satisfaction of the consumer remains the same.

39. Table 2. Schedule
Combin Apples Orange MRS =
ations (X) s (Y) Loss Y/
Gain X
A 1 10 _
B 2 7 3/1
C 3 5 2/1
D 4 4 1/1

40. Table 2. indicates that the consumer will
give up
 3 oranges for getting the second apple,
 2 oranges for getting the third apple
and
 1 orange for getting the fourth apple.
In other words, MRS of apples for oranges
goes on diminishing.

41. ?
It diminishes ;
 As Law of Diminishing marginal rate of substitution is an
extensive form of Law of diminishing marginal utility.
 According to Law of Diminishing Marginal Utility,
As Consumption by Marginal Utility goes on
Consumer
1) Increases 1) Diminishing
2) Decreases 2) Increasing
 Consequently, consumer is willing to give up less and less
units of oranges for every additional unit of apple.
 Therefore, Marginal rate of substitution of apples for
oranges diminishes.

42. The Marginal rate of substitution is constant if to
obtain one more unit of X, only one unit of Y is
sacrificed to maintain same level of satisfaction.
Marginal rate of substitution of Perfect Substitutes
is constant.
Table 3.
Combination Apples Oranges MRS=
Loss Y/Gain X
A 1 10 _
B 2 9 1/1
C 3 8 1/1
D 4 7 1/1

43. Indifference
Curve will be a
Straight line
falling
downwards from
left to right.

44. It implies that as the stock of a commodity increases with
the consumer he substitutes it for the other commodity
at an increasing rate to maintain the same level of
satisfaction.
Table 4.
Combinations Apples Oranges MRS=
Loss Y/Gain X
A 1 10 _
B 2 9 1/1
C 3 7 2/1
D 4 4 3/1

45. Indifference
Curve will be
Concave to the
point of origin.

46. Type of Price effect Income Shape of
goods effect Demand
Curve
1) Normal Negative Positive Slopes
Goods Upward
2) Inferior Negative Negative Slopes
Goods Downward
3) Giffen’s Positive Negative Slopes
Goods Upward

47. Basis of Law of Diminishing Marginal Law of Diminishing
Difference Utility Marginal Rate of
Substitution
1) Measurement Unrealistic assumption that Realistic assumption that
in marginal utility can be utility can be measured in
Cardinal/Ordi measured in Cardinal Ordinal numbers.
nal numbers numbers.
2) Independence Utility of one commodity is Utility of one commodity
of Commodities independent of the utility is dependent of the utility
of other commodity. of other commodity.
3) Marginal Assumption is that MUm No such assumption.
utility of money remains constant.
(MUm)