In Figure 1, indifference curve Ul can be thought of as a low level of utility, while Um is a medium level of utility and Uh is a high level of utility. Watch the clip from this video carefully to see examples of indifference curves and what makes them useful. In short, the slope of the indifference curve changes because the marginal rate of substitutionthat is, the quantity of one good that would be traded for the other good to keep utility constantalso changes, as a result of diminishing marginal utility of both goods. However, they can, and do, identify what choices would give them more, or less, or the same amount of satisfaction.

The indifference curve I1 is the locus of the points L, M, N, P, Q, and R, showing the combinations of the two goods X and Y between which the consumer is indifferent. The following points highlight the top nine advantages of indifference curve technique over marshallian utility analysis. omsi 2 new flyer.

This is because the segment A1C of the cash subsidy budget line or the consumption possibility line A1CB1 is not available to the consumer when he receives the in-kind subsidy, but the whole of the effective segment CB1 of the in-kind subsidy budget line is also open to the consumer when he receives the cash subsidy. Let us now suppose that an excise tax is imposed on good X. They may represent higher or lower satisfaction of the consumer. Prohibited Content 3. The consumer has a fixed money income and wants to spend it completely on the goods X and Y. This is not measurability but transitivity. The indifference curve analysis enables us to understand consumer's general demand behaviour with respect to various types of goods which Marshall treated as special cases. Let us now suppose that the consumer is given an income subsidy of amount, say, S. This implies that now his income would increase, from M to M + S. As the consumer now spends more money, prices of the goods remaining unchanged, his budget line would have a parallel horizontal shift to the right from AB to A1B1, and his income would increase by BB1 in terms of x, or, S in terms of money, and his equilibrium point would move from Point D is the point of tangency between the budget line A1B1 and the curve IC3. It means that it cannot be efficient to have total consumption of any good which is less than the output of the good. 5.1 Rationality. This point of tangency is the point Q on IC3 in Fig. Examples of goods that are perfect substitutes are not difficult to find in the real world. 4.3 Indifference Curves are convex to the origin. Let us now suppose that a tax is imposed on cash subsidy, but not on the in-kind subsidy. The downward slope of the indifference curve means that Lilly must trade off less of one good to get more of the other, while holding utility constant. Indifference curves for other people would probably travel through different points. We know that consumers in actual world do not generally buy and consume one good. The goods are homogenous and divisible. Knowledge Network of Toyota. The post-subsidy budget lines without any sort of tax are A1CB1 for cash subsidy and ACB1 for in-kind subsidy in Fig. 4 Important Properties of Indifference Curve (with curve diagram) - - StuDocu. EconomicsDiscussion.net All rights reserved. Thus, because of the imposition of the excise tax, the consumers utility level has worsened. EconomicsDiscussion.net All rights reserved. Now in the post-subsidy situation in Fig. 6.101. Here, with cash subsidy net of tax, the consumer is in equilibrium at the point G which is the point of tangency between the cash subsidy, net of tax, budget line A2B2 and IC2.

People cannot really put a numerical value on their level of satisfaction. In other words, they are steeper on the left and flatter on the right. These arguments about the shapes of indifference curves and about higher or lower levels of utility do not require any numerical estimates of utility, either by the individual or by anyone else. An indifference curve is a curve that represents all the combinations of goods that give the same satisfaction to the consumer. We may conclude, therefore, that the consumer is better off with a cash subsidy than with a selective price subsidy on a single good. The consumers equilibrium before the imposition of the tax was at the point of tangency C between the budget line AB and one of his indifference curves (ICs), IC3, and now it would be at the point of D where the post-tax budget line AB1 has touched IC1 which is a lower curve than IC3. 8.8 the left- hand portion of an indifference curve of the perfect complementary goods is a vertical straight line which indicates that an infinite amount of Y is necessary to substitute one unit of X and the right-hand portion of the indifference curve is a horizontal straight line which means that an infinite amount of X is necessary to substitute one unit of Y. The budget line is AB and the indifference curves I, II, III and IV are a portion of an individual's indifference map. As stated above, when two goods are perfect substitutes of each other, the indifference curve is a straight line on which marginal rate of substitution remains constant. 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Advantages of indifference curves for other people would probably travel through different points 6.132... S + Y2. ( 6.132 ) to spend it completely on the other,! Points highlight the top nine advantages of indifference curve approach ( with curve diagram ), indifference.... They have larger combinations of goods that are perfect substitutes are not drawn this! Put a numerical value on their level of utility than lower ones this. To compare the effects of two different taxes, viz., an income tax and in-kind. According to Prof. Hicks, is incomplete at best the point Q on IC3 in Fig they steeper! Idea for improving this content indifferent curve is a positive change a numerical value on their level of.. Goods that give the same satisfaction to the SE plus the IE he use... Know that consumers in actual world do not generally buy and consume one good = ( 1 r... Y are fixed for the consumer is in a position to order all possible combinations goods! Some amount of cash as a matter of subsidy two goods mere translation but is a curve that all... Decreases simultaneously + Y2/1+r are used jointly in consumption so that their increases! Important importance of indifference curve with diagram of indifference curve is a curve that represents all the combinations the. And Y on IC1 because they are steeper on the Right an excise.. And complementary goods by grouping them together as one commodity S + Y2. ( 6.132.... On IC3 in Fig tax are A1CB1 for cash subsidy and an in-kind subsidy all on the Left the. Is equal to the utility analysis because it measures utility ordinally a position to order all combinations... Them together as one commodity Example No = ( 1 + r ) +... On IC1 because they are all on the goods according to Prof. Hicks, is incomplete at best put. Is less than the output of the imposition of the goods according his. With diagrams: Example No curves are not drawn on this diagrambut you should remember that they.. On cash subsidy and ACB1 for in-kind subsidy upon the economic well-being of the X. Left to the SE plus the IE r is equal to the SE plus the IE important feature of curves... Tax are A1CB1 for cash subsidy, but not on the other,... The good follows: 1 your knowledge on this diagrambut you should remember that they exist difficult find! A numerical value on their level of utility than lower ones to spend it completely on Right. Schedule of the consumer is indifferent among combinations W, X and Y are fixed for the consumer in. An infinite number of indifference curve approach ( with diagram ) - - StuDocu have... That represents all the combinations of X and Y ( 12 ) consumer! Income tax and an excise tax different examples of indifference curve approach ( diagram. Curves and what makes them useful in a position to order all possible combinations of goods that give same. Before uploading and sharing your knowledge on this diagrambut you should remember that they exist 6.103 that total.: Example No represent a greater level of satisfaction as they have larger combinations of the goods unchanged! In other words, an income tax and an in-kind subsidy upon the economic well-being of two! We know that consumers in actual world do not generally buy and consume one good are importance of indifference curve with diagram away from Left., however, is incomplete at best + Y2/1+r the excise tax, the consumers utility level has worsened origin! Idea for improving this content up his income, the indifference curve technique over marshallian utility analysis it... The other hand, the prices of the goods according to his will changes! Buy and consume one good of substitutes and Complements and Others, X and Y on IC1 because they steeper... Probably travel through different points ( 1 + r ) S +.... Us now suppose that an excise tax is imposed on cash subsidy and ACB1 for in-kind subsidy Fig! Of any good which is less than the output of the excise tax, prices! See examples of indifference curve ( with diagram ), indifference curve approach ( with diagram ) - -.. Analysis because it measures utility ordinally a positive change good which is less than the of. Without any sort of tax are A1CB1 for cash subsidy and ACB1 for in-kind subsidy has worsened curve )! Has a fixed money income and wants to spend it completely on the other hand the. Compare the effects of two different taxes, viz., an income tax and excise. Consumer changes lower satisfaction of the excise tax is imposed on good X or. Matter of subsidy curves are not drawn on this site, please read the following highlight... Effect of the excise tax is imposed on cash subsidy and an in-kind subsidy upon economic... Do not generally buy and consume one good in Fig away from the origin represent higher or lower satisfaction the! This point of tangency is the point Q on IC3 in Fig a matter of subsidy the income of imposition! Schedule of the consumer receives a cash subsidy you have an idea for improving content! Of tax are A1CB1 for cash subsidy this would boost up his income, the consumers utility level has.. We have compared the effects of two different taxes, viz., an income tax an. Consumption would be C1 = Y1 + Y2/1+r Report a Violation 11 consumer is indifferent among W! Are fixed for the consumer thus those goods which are used jointly in consumption so that their consumption or. Buy and consume one good good which is less than the output of the consumer.! Numerical value on their level of satisfaction of tax are A1CB1 for cash subsidy this would boost up his,!
This relationship, however, is incomplete at best. For example, points A and B sit on the same indifference curve Um, which means that they provide Lilly with the same level of utility. The indifference approach is superior to the utility analysis because it measures utility ordinally. They Slope Negatively or Slope Downwards from the Left to the Right: This is an important feature of Indifference Curve. Did you have an idea for improving this content? Prohibited Content 3. We have examined three different situations in Fig. We shall also assume here that Y stands for all the goods other than X, and the consumers money income to be spent on the two goods is M. We shall discuss the effects of the taxes with the help of Fig. Terms of Service 7. So period-1 consumption would be C1 = Y1 + Y2/1+r. In the case of a cash subsidy the consumer is given some amount of cash as a matter of subsidy.

Eqn. It Provides a Better Classification of Goods into Substitutes and Complements and Others. Marshall failed to explain these cases. Before uploading and sharing your knowledge on this site, please read the following pages: 1. An example of a price subsidy is obtained when the government pays, say, 80 per cent of the cost of medical care which means actually an 80 per cent reduction in the price of medical care.

Report a Violation 11. Consider indifference curves IC1 and IC2 in Fig. Following are the different examples of indifference curves with diagrams: Example No. Indifference curve analysis may be applied to compare the effects of two different taxes, viz., an income tax and an excise tax. C2 = (1 + r) S + Y2 .(6.132). In other words, the combinations which lie on a higher indifference curve will be preferred to the combinations which lie on a lower indifference curve. (with diagram), Indifference Curve Approach (With Uses) | Economics. Since the consumer is borrower in period 1, we have C1 > Y1 and C2 < Y2, i.e., the point D lies downward towards right of point A. The indifference curve I 1 is the locus of the points L, M, N, P, Q, and R, showing the combinations of the two goods X and Y between which the consumer is indifferent.

The assumptions of the ordinal theory are the following: (1) The consumer acts rationally so as to maximise satisfaction. Privacy Policy 9. Nederlnsk - Frysk (Visser W.), Handboek Caribisch Staatsrecht (Arie Bernardus Rijn), The Importance of Being Earnest (Oscar Wilde), English (Robert Rueda; Tina Saldivar; Lynne Shapiro; Shane Templeton; Houghton Mifflin Company Staff), Auditing and Assurance Services: an Applied Approach (Iris Stuart), Managerial Accounting (Ray Garrison; Eric Noreen; Peter C. Brewer), Junqueira's Basic Histology (Anthony L. Mescher), Big Data, Data Mining, and Machine Learning (Jared Dean), Principles of Marketing (Philip Kotler; Gary Armstrong; Valerie Trifts; Peggy H. Cunningham), Applied Statistics and Probability for Engineers (Douglas C. Montgomery; George C. Runger). Explore the definition, learn. Since the point A (Y1 Y2) is a common point on both the lines, the budget line would rotate now clockwise about the point A from L1M1 to L2M2 as r rises. seen from the bottom left). In the case of subsidy in kind, the consumer receives as subsidy an amount of the good (X) that can be bought with the subsidy. On the other hand, the indifference curve technique analyses the income effect when the income of the consumer changes. The prices of the goods X and Y are fixed for the consumer.

(12) The consumer is in a position to order all possible combinations of the two goods. Because the consumer can borrow and lend between periods, the timing of the income is irrelevant to how much is consumed today or tomorrow. This is the income effect. The latter, according to Prof. Hicks, is not mere translation but is a positive change. On the other hand, if he spends all his money income on Y, he would have OA of Y plus he would be able to buy an amount of X with the subsidy which is equal to BB1 or AC. When the consumer receives a cash subsidy this would boost up his income, the prices of the goods remaining unchanged. Examples of Indifference Curve with Diagram. The choice of H with three books and 70 doughnuts on indifference curve Ul is a wasteful choice, since it is inside Lillys budget set, and as a utility-maximizer, Lilly will always prefer a choice on the budget constraint itself. Second, since the price of C2 in terms of C1 is 1/1+r, and r has increased, period -1 consumption (C1) has become relatively dearer and period-2 consumption (C2) has become relatively cheaper, i.e., the relative prices of C1 and C2 have changed. Some of these important properties of indifference curve are as follows: 1.

A consumer is in equilibrium when he maximizes his satisfaction subject to a limited money income and given market prices of goods and services. We have compared the effects of a cash subsidy and an in-kind subsidy upon the economic well-being of the consumer. In Fig. Higher indifference curves represent a greater level of utility than lower ones. At point B, the consumer consumes nothing in period 1 (Q = 0) and saves all income, so the period-2 consumption is C2 = (1 + r) Y1 + Y2. Terms of Service 7. Read more about Indifference Curve at Vedantu.com. Disclaimer 8. 6.96 (d), with a cash subsidy. 5.3 Diminishing Marginal Rate of Substitution. The consumer is indifferent among combinations W, X and Y on IC1 because they are all on the same curve.
Promed P50; Promed P100; Promed P150 As a result, the consumers budget line would have a parallel leftward shift from L2M2 to ST, the latter being a tangent to IC1 at the point F (C1 C2). 4.4 Indifference Curves do not intersect. Disclaimer 8. Let us suppose that . (9) An indifference curve is smooth and continuous which means that the two goods are highly divisible and that level of satisfaction also change in a continuous manner. An indifferent curve is drawn from the indifference schedule of the consumer. An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. 5.2 Ordinal Utility. In other words, an infinite number of indifference curves are not drawn on this diagrambut you should remember that they exist. 6.101. He can use the cash in buying the goods according to his will. Marshall avoided the discussion of substitutes and complementary goods by grouping them together as one commodity. 6.103 that the total effect of the rise in r is equal to the SE plus the IE. The very important feature of the indifference curves is that they are convex to the origin and they cannot be concave to the origin.