In this case budget line would cut the straight-line indifference curves. This property of indifference curve is based on the principle of diminishing marginal rate of substitution, explained in the previous section. As will be seen in Fig. However, distaste for variety cannot be considered a normal or model behaviour, so we regard convexity to be the general case. This implies that more of commodity X a consumer has the more useful or significant in terms of satisfaction an extra unit of it becomes.
It would mean that every point on the two separate indifference curves would have the same utility, which is the complete opposite of the first rule of indifference curves, that all points on them have the same utility. Thus, the consumer will definitely prefer A to B, that is, A will give more satisfaction to the consumer than B. Properties of Indifference Curves 1. Indifference curve is convex to the origin. Another non-normal case is of perfect complementary goods, is depicted to Figure 8.
If two indifference curves intersect, this violates the last assumption of individual preferences that more is preferred over less of a good. The marginal rate of substitution is the amount of one good i. Such indifference curves are against our basic assumption. This can be explained in terms of Marginal rate of substitution of good X for good Y. We know that consumers in actual world do not generally buy and consume one good. You would be happier with more puppies, but you would notbe happier with more air.
Conclusion: In our analysis above, we have shown that corner solution of consumer s equilibrium is possible even when his indifference curves between goods are convex. You would also not be less happy withmore air. Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget. The convexity of the indifference curve illustrate the diminishing rate of substitution of X for Y associated with the movement down the curve from left to right. It is worth noting that in case of convex indifference curves, corner equilibrium is however not inevitable, it occurs only when price of a commodity is too high as compared to the marginal rate of substitution of even the first unit of the commodity. In indifference curve approach, this assumption has been dropped.
Consumer have the ability to choose among the combination of goods and services available. This is absurd and impossible. Indifference curves are convex to the origin because as the consumer begins to increase his or her use of one good over another, the curve represents the marginal rate of substitution. This is quite inconsistent with the observed behaviour of consumers. On the other hand, he is willing to part with fewer and fewer units of commodity' Y' at each stage to obtain each additional unit of 'X'. The consumer is indifferent towards points a and b as they represent equal level of satisfaction. But a glance at Fig.
We would obviously have a point, let's call it A, where this does not hold true. Learning Objectives After reading this chapter, you are expected to learn about: Learning Goal 1: Demonstrate an understanding and significance of the concept of Indifference Curve. For example, if you may be very pleased to have two pizzas instead of one. In a way it contributes to the Welfare economics. This is due to the concept of the diminishing marginal rate of substitution between the two goods. It follows that the combination F will be equivalent to E in terms of satisfaction.
If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. The greater the fall in marginal rate of substitution, the greater the convexity of the indifference curve. The marginal rate of substitution of X for Y is the quantity of Y good that the consumer is willing to give up to gain a marginal unit of good X. The indifference curve is reflecting the substitution between two goods and their associated satisfaction. An introduction to positive economics fourth ed.
In economic terms it means that the price or opportunity cost of commodity X in the market is greater than the marginal rate of substitution of X for Y which indicates willingness to pay for the commodity X. In such cases the indifference curve is a straight line at an angle of 45 degree with either axis. It should be noted that in these cases too, the consumer will not be in equilibrium at any point between B and L on the price line since in case of Figure 8. In case of perfect substitutes, the indifference curves are parallel straight lines because the consumer equally prefers the two goods and is willing to exchange one good for the other at a constant rate. Indifference curve analysis is only.
If indifference curves were concave or straight lines, the consumer would succumb to monomania, that is, he would buy and consume only one good. This creates on obvious problem. · The marginal rate of substitution is the amount of one good i. It overcomes the weakness of Cardinal measurement as the satisfaction cannot be measured objectively. Thus, as he moves upward from tangency point Q on the budget line his satisfaction will go on increasing until he reaches the extremity point B. So, I may beequally happy with 2 puppies and 2 piles of garbage as I would bewith 5 puppies and 5 piles of garbage.
In the above diagram, two indifference curves are showing cutting each other at point B. Hence consumer is indifferent about the various combinations of two goods along with the indifference curve. Persons would be willing to trade less and less of one good for another. It is thus manifest that even in case of perfect substitutes, the consumer will succumb to monomania. Indifference curves are convex to the origin because the increase in utility from an increase of a single unit of any product does not remain the same. . An indifference curve is the graph which shows.