Budget line or price line is essential to know the equilibrium of an individual consumer. The price that a consumer pays for a commodity indicates the level of utility derived by him. The modern theory of consumer behaviour is also known as the indifference curve approach. It can only be ranked or ordered. This is an important feature of an indifference curve. By asking the consumer how much of Y he will be prepared to abandon for the successive additions of X in his stock so that his satisfaction remains equal to what he derives from the initial combination 2X+14Y we get combinations 3X+ 10Y, 4X + 7Y, 5X+ 5Y and 6X+ 47.
For the same reason, it can be said that indifference curve will not be vertical. Also, two goods can never perfectly substitute each other. Thus, this theory is also known as ordinal approach. In schedule 1, the consumer has to start with 1 unit of X and 12 units of Y. The following diagram will help you understand this property clearer. Now the consumer must be able to say which commodity he prefers.
It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for and assignment help services. With the change in income the price or budget lines are drawn parallel to each other. Diagram 4 C shows that the consumption of both X and Y commodities is increasing which is not possible with constant income. It is a graphical representation of an indifference schedule, which enlists all such combinations of the goods in a tabular form, giving exactly the same total satisfaction to the consumer.
Different economists have defined indifference curves in different ways. He may decide to buy biscuits only, in which case he can buy 50 biscuits. Budget Line or Price Line 5. Because the field in a two- dimensional diagram contains an infinite number of points, each representing a combination of goods X and Y, there will be an infinite number of the indifference curves each passing through combinations of goods that are equally desirable to the consumer. Indifference curves do not cross each other and they never intersect. Each of the six combinations of the two goods is represented by a single point on the curve in the figure.
The consumer gets the maximum possible satisfaction from his given income at point C on the indifference curve I 3. It takes into consideration different goods including substitutes and complementary goods as well which is more realistic and practical analysis of consumer behaviour. Consumer choices are consistent with a simple postulate of rationality. Thus, indifference curve shows these combinations of goods which give the consumer an equal satisfaction. If we depict this in the form of a curve, we get an indifference curve. The disbelief on the measurement of utility forced them to explore an alternative approach to study consumer behavior.
For example, 2 pairs of shoes and 4 pairs of shirts or 4 pairs of shoes and 2 pairs of shirts will give the same level of satisfaction. Indifference curves, like many aspects of contemporary , have been criticized for oversimplifying or making unrealistic assumptions about human action. Bundle X has more bananas but fewer apples than bundle Y. Geometrical technique can study more than two goods and algebra has to be used which is complicated one. Indifference curve cannot intersect each other Each indifference curve is a representation of particular level of satisfaction. Therefore, two indifference curves cannot intersect.
It is also known as expenditure line, consumption possibility line, price-income line, etc. This means that as the amount of good X is increased by equal amounts, that of good Y diminishes by smaller amounts. It means there is consistency and transitivity in preferences. In other words, the marginal rate of substitution explains the tradeoff between two goods. Economics Indiffrence schedule An indifference schedule refers to a table showing diffrent combination of two commodities which yield equal satisfaction. Hence, the indifference curve approach based on ordinal ranking preference was evolved. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C.
We, therefore, conclude that indifference curves cannot cut each other. At this point, therefore the consumer is in equilibrium. Then the indifference schedule is as shown below: Table: Indifference Schedule From above schedule it can be understood that as the number of biscuits is rising, the number of bananas is diminishing, therefore the level of satisfaction is similar for all combinations. Substitutes and Complements In indifference curve analysis, there exist substitutes and complements for the goods preferred by the consumer. We cannot segregate income effect and substitution effect from price effect.
Now, our next step is to go from indifference schedule to indifference curve. The concept of indifference curve analysis was first propounded by British economist Francis Ysidro Edgeworth and was put into use by Italian economist Vilfredo Pareto during the early 20 th century. The concept of scale of preference has been explained by indifference curve. If we plot the figures of indifference schedule in following diagram we obtain on indifference curve. The analysis has been widely accepted and used in all the parts of economics. Whenever there is change in the price of a commodity the effects are divided into two categories, namely, income effect and substitution effect.
. Indifference Map: An individual consumer has different levels of satisfaction with different combinations of two commodities. According to Hicks and Allen, utility cannot be measured. All other economic variables and possible complications are treated as stable or ignored unless placed on the indifference graph. This is because the concept of ordinal utility does not involve the quantitative measurability of utility. He purchases two goods, X and Y only. Refer to the above table.