Economics
Indifference Curve
An indifference curve represents a graphical depiction of all the combinations of two goods that provide a consumer with an equal level of satisfaction. It shows the various trade-offs a consumer is willing to make between the two goods while maintaining the same level of satisfaction. The slope of the indifference curve reflects the consumer's marginal rate of substitution between the two goods.
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10 Key excerpts on "Indifference Curve"
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
Figure 7.10 shows that it is likely that most students will eventually settle at a position somewhere near the middle of the graph. The notion of “balance” suggests that a student will want to consume some of each good. An Indifference Curve reflects consumer preferences. However, consumers must spend within their limits, or, in language that is more technical, they must comply with a budget constraint, the theme of the following section. After studying the budget constraint, it will be combined with Indifference Curves to find a utility-maximizing (most satisfying) equilibrium point that combines what consumers want with what they can afford.QUICK QUIZ 7.9 What is an equilibrium?7.6 The budget constraint
Indifference Curves are everywhere, as shown in this graph, with the satisfaction provided by one good shown on each axis. This collection of Indifference Curves (as in Figure 7.11 ) is called an Indifference Curves map.Figure 7.11 An Indifference Curve mapThe Indifference Curves shown in Figure 7.11 each include a group of points that represent combinations of the two goods. In addition, each point (combination) on a single curve yields the same amount of satisfaction. Given the assumption that more is preferable to less, the level of utility increases as one moves to the northeast from the graph’s origin to curve I0 , to curve I1 , and to curve I2 . The consumer’s budget limits him to considering only those combinations on the highest attainable Indifference Curve. The consumer is constrained by a budget. Utility, or consumer preference, is represented by the Indifference Curves, and the budget constraint represents the amount that the consumer has to spend on the goods.- • Budget Constraint = a limit on consumption determined by the size of the consumer’s budget and the prices of goods.
A line added to Figure 7.11 shows the consumer’s budget constraint. Assume that a consumer spends all of his income on only the two goods (food and clothes) in Figure 7.12
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
Suppose that there are two ways for a college student to spend time: (1) studying and (2) relaxing. The possibilities are depicted in Figure 7.10. If a student has been working all of the time, he may be willing to give up several hours of work to get the first hour of play. As a student increases the amount of play, extra hours of play become less valuable, as shown in Figure 7.10. The Indifference Curve in Figure 7.10 shows that it is likely that most students will eventually settle at a position somewhere near the middle of the graph. The notion of “balance” suggests that a student will want to consume some of each good. An Indifference Curve reflects consumer preferences. However, consumers must spend within their limits, or, in language that is more technical, they must comply with a budget constraint, the theme of the following section. After studying the budget constraint, it will be combined with Indifference Curves to find a utility-maximizing (most satisfying) equilibrium point that combines what consumers want with what they can afford. Quick Quiz 7.9 What is an equilibrium? 7.6 The budget constraint Indifference Curves are everywhere present in a graph drawn with the satisfaction provided by one good shown on each axis. This collection of Indifference Curves (as in Figure 7.11) is called an Indifference Curve map. The Indifference Curves shown in Figure 7.11 each include a group of points that represent combinations of the two goods. In addition, each point (combination) on a single curve yields the same amount of satisfaction. Given the assumption that more is preferred to less, the level of utility increases as one moves to the northeast from the graph’s origin to curve I 0, to curve I 1, and to curve I 2. The consumer’s budget limits him to considering only those combinations on the highest attainable Indifference Curve. The consumer is constrained by a budget
- Roberto Serrano, Allan M. Feldman(Authors)
- 2018(Publication Date)
- Cambridge University Press(Publisher)
We need one axis to represent the amount of x 1 , and a second axis to represent the amount of x 2 . If we were to show utility in the same picture as quantities of the two goods, we would need a third axis to represent the utility level u that corresponds to the consumption bundle ( x 1 , x 2 ) . A utility function in such a three-dimensional picture looks like a 18 2 Preferences and Utility 0 20 40 60 80 100 0 50 100 0 50 100 0 20 40 60 80 100 0 20 40 60 80 100 Good 1 Good 1 Good 2 Good 2 Utility Figure 2.9 The Indifference Curves (bottom) are the level curves of the utility function (top). 2.5 Utility Functions and the Marginal Rate of Substitution 19 hillside. But three-dimensional pictures are hard to draw. It is much easier to draw two-dimensional graphs with level curves. A level curve for a function is a set of points in the function’s domain, over which the function takes a constant value. If you’ve hiked or climbed mountains with the help of a topographical map, you have used a picture with level curves; an elevation contour on the map is a level curve. Similarly, a weather map has level curves; the isobar lines represent sets of points with the same barometric pressure. ( Isobar means: the same bar ometric pressure.) An Indifference Curve is a set of points in the consumption bundle picture, among which the consumer is indifferent. Since she is indifferent among these points, they all give her the same utility. Hence, the Indifference Curve is a level curve for her utility function. Therefore, in order to represent a consumer’s utility function, we will simply draw its level curves, its Indifference Curves, in the ( x 1 , x 2 ) quadrant. This is like transforming a three-dimensional picture of a mountain into a two-dimensional topographical map, with elevation contours.
eBook - PDF- Martha L. Olney(Author)
- 2015(Publication Date)
- Wiley(Publisher)
Combinations of goods A and B that provide more utility are further from the origin. The Indifference Curve I 1500 shows combinations of A and B that provide 1,500 utils of satisfaction. 70 Chapter 5 Consumer Theory Indifference Curve. When you move between points x and y, total utility does not change. You lose utility equal to Q A × MU A . (Remember: MU A is the change in utility from consuming one more unit of A.) You gain utility equal to Q B × MU B . Total utility does not change, so the lost utility plus gained utility must equal zero. Q A × MU A + Q B × MU B = 0 Manipulating Q A × MU A = −Q B × MU B Dividing Q A Q B = − MU B MU A Q A is the “rise” and Q B is the “run.” So Q A /Q B is the slope of the indif- ference curve. slope = rise run = Q A Q B = − MU B MU A The slope of the Indifference Curve is the negative of the ratios of the marginal utilities of the two items. The slope measures the rate at which we substitute beef (measured on the horizontal axis) for apples (measured on the vertical axis). Economists say: The slope of the Indifference Curve is the marginal rate of sub- stitution. As we move along an Indifference Curve from upper left to lower right, the curve gets flatter and flatter. Ignoring the negative sign, the slope gets smaller and smaller (closer and closer to zero). The Indifference Curve gets flatter because of the law of diminishing marginal utility. Economists say: Because of the law of diminishing marginal utility, there is a diminishing marginal rate of substitution as we substitute more and more B for A. Indifference Curves with more of both apples and beef will be further from the origin. The further the Indifference Curve is from the origin, the higher the total utility. In Figure 5.3b we see two Indifference Curves. One is for total utility of 1,000 utils. The second curve, above and to the right of the first curve, is for total utility of 1,500 utils.
- Walter Nicholson, Christopher Snyder(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 3 ● Utility and Choice 59 three Indifference Curves have been drawn and are labeled U 1 , U 2 , and U 3 . These are only three of the infinite number of curves that characterize an individual’s entire Indifference Curve map . Just as a map may have many contour lines (say, one for each inch of altitude), so too the gradations in utility may be very fine, as would be shown by very closely spaced Indifference Curves. For graphic convenience, our analysis generally shows only a few in-difference curves that are relatively widely spaced. The labeling of the Indifference Curves in Figure 3.4 has no special meaning except to indicate that utility increases as we move from combinations of good on U 1 to those on U 2 and then to those on U 3 . As we have pointed out, there is no precise way to measure the level of utility associated with, say, U 2 . Similarly, we have no way of measuring the amount of extra utility an individual receives from consuming bundles on U 3 instead of U 2 . All we can say is that utility increases as this person moves to higher Indifference Curves. That is, this person would prefer to be on a higher curve rather than on a lower one. This map tells us all there is to know about this person’s preferences for these two goods. Although the utility concept may seem abstract, marketing experts have made practical use of these ideas, as Application 3.3: Product Positioning in Marketing shows. 3-5 Illustrating Particular Preferences To illustrate some of the ways in which Indifference Curve maps might be used to reflect particular kinds of preferences, Figure 3.5 shows four special cases.
- Berkeley Hill(Author)
- 2013(Publication Date)
- Pergamon(Publisher)
2.7 and 8, each schedule corresponding to a given level of satisfaction, any number of further combinations could have been inserted using part-litres. If however only whole litres were avail-able to the consumer, the curve should not have been drawn smooth, but as a series of separated points, as in Fig. 2.13. Commodities which only come in relatively large units are termed lumpy. Indifference Curve theory deals with the situation of lumpiness better than utility theory. If a budget line touches the Indifference Curve at a point, it can be seen that quite a large shift in angle of the budget line is required before a new optimum choice results (Fig. 2.13); i.e. relative prices have to alter considerably before the consumer's best choice at one level of FIG. 2.13 Lumpy Commodities Optimum combination for the consumers . , , Λ ^ r . _ s' Quantity of good B Budget Budget line I line 2 Indifference 'curve Explaining the behaviour of individuals 31 satisfaction is changed. If liquids were available to the consumer by the millilitre as opposed to by the litre, the Indifference Curve would be a much smoother curve because of all the intermediate combinations, and the optimum allocation of spending on beer and milk would be con-sequently much more sensitive to relative changes in price. The Stable and the Unstable Equilibrium When a consumer has allocated his spending power in the way which· gives him the greatest level of satisfaction attainable at the given level of income and prices, he is said to be in equilibrium. Furthermore, it is a stable equilibrium because, if some temporary factor such as rationing forces him to buy some other combination of goods, when these factors are removed, he will tend to return to his original combination, driven by his desire to maximise his satisfaction. An analogy is a ball in a basin; if displaced to the side, it will return by gravity to the lowest point to restore the status quo.
eBook - ePub- Gary Becker, Gary S Becker(Authors)
- 2017(Publication Date)
- Routledge(Publisher)
g on concave segments would never be optimal, they would never be chosen. For this reason, rather than any introspection about diminishing marginal utilities or rates of substitution, economists assume convex Indifference Curves for the goods actually consumed. Utility maximizing consumers would never end up in other regions.The slope of the budget line gives the rate of transferring X into Y in the market place whereas the slope of an Indifference Curve gives the rate of transferring X into Y along the same preference level. Optimality requires equality between these slopes. If the consumer were at point g in Figure 6.2 , convexity implies that the (absolute value of the) slope of his Indifference Curve going through g would exceed the slope of his budget line. By converting Y into X along the budget line, he would move to a higher Indifference Curve since the amount of X acquired would be more than sufficient to compensate for the loss in Y. Similarly, if he were at a point h to the right of e, converting X into Y at the market rate would raise his preference level. The point of tangency e is clearly, therefore, the optimal position; he would not leave e and would move to e
eBook - PDFIntermediate Microeconomics
An Intuitive Approach with Calculus
- Thomas Nechyba(Author)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
The slope of the budget constraint represents the rate at which the shop is allowing the consumer to change jeans into hoodies. The slope of the Indifference Curve, in contrast, represents the marginal rate of substitu-tion, which is the number of hoodies the consumer is willing to give up to gain one more pair of jeans. If the consumer has a bundle in their shopping basket at which the value they place on jeans in terms of hoodies differs from the rate at which the shop is allowing them to change jeans into hoodies, the consumer can make themselves better off by choosing a different bundle. Thus, at the optimal bundle, the rate at which the consumer is willing to trade jeans for hoodies and the rate at which they have to trade them must be equal. Suppose the consumer chooses B from panel (c) of Graph 6.1, 8 pairs of jeans and 4 hoodies, in their shopping basket. The marginal rate of substitution at B is 1/2. This means that the consumer is willing Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 100 CHAPTER 6 DOING THE BEST WE CAN to trade 1 pair of jeans for half a hoodie, but the shop will give the consumer 2 hoodies for every pair of jeans that they put back on the shelf. If the consumer is willing to trade a pair of jeans for half a hoodie and the shop will give them 2 hoodies for a pair of jeans, the consumer can clearly make themselves better off by trading jeans for more hoodies.
eBook - PDFMicroeconomic Theory
Basic Principles and Extensions
- Walter Nicholson, Christopher Snyder(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
In making choices, individuals will behave as though they were maximizing this function. • Utility functions for two goods can be illustrated by an Indifference Curve map. Each Indifference Curve contour on this map shows all the commodity bundles that yield a given level of utility. • The negative of the slope of an Indifference Curve is defined as the marginal rate of substitution ( MRS ). This shows the rate at which an individual would willingly give up an amount of one good ( y ) if he or she were compensated by receiving one more unit of another good ( x ). • The assumption that the MRS decreases as x is substituted for y in consumption is consistent with the notion that individuals prefer some balance in their consumption choices. If the MRS is always decreasing, individuals will have strictly convex Indifference Curves. That is, their utility function will be strictly quasi-concave. • A few simple functional forms can capture important differences in individuals’ preferences for two (or more) goods. Here we examined the Cobb–Douglas function, the linear function (perfect substitutes), the fixed proportions function (perfect complements), and the CES function (which includes the other three as special cases). • It is a simple matter mathematically to generalize from two-good examples to many goods. And, as we shall see, studying peoples’ choices among many goods can yield many insights. But the mathematics of many goods is not especially intuitive; therefore, we will primarily rely on two-good cases to build such intuition. Problems 3.1 Graph a typical Indifference Curve for the following utility functions, and determine whether they have convex Indifference Curves (i.e., whether the MRS declines as x increases). a. U 1 x , y 2 5 3 x 1 y . b. U 1 x , y 2 5 x # y . c. U 1 x , y 2 5 x 1 y . d. U 1 x , y 2 5 x 2 2 y 2 . e.
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
Other students sometimes think that the labeled points in Exhibit 4.8A illustrate the shape of the demand curve. This is also incorrect. It is true that each point on the demand curve arises from a point in the Indifference Curve diagram, but translating from one diagram to the other is not simply a matter of copying points. The only way to go from one diagram to the other is via the five-step process just described. The Shape of the Demand Curve In Exhibit 4.8, eggs obey the law of demand; therefore, the demand curve for eggs slopes down. If eggs were a Giffen good, then the tangency B would be to the right of A, say, at a quantity of 7. Then the point B 0 on the demand curve would have horizontal coordinate 7 and the demand curve would slope upward. 4.3 Income and Substitution Effects We have a puzzle to solve: Why, in the real world, do there seem to be essentially no Giffen goods? It would be very satisfying to answer this question by saying that the geometry of Indifference Curves makes Giffen goods impossible. Unfortunately, that EXHIBIT 4.8 Constructing the Demand Curve 0 Eggs 2 3 5 8 12 8 4 A B C Root beer 0 Quantity of eggs 2 3 3 5 6 2 A ´ B ´ C ´ P x = $3 P x = $2 P x 5 $6 A. Beth’s Indifference Curves B. Beth’s demand curve Price of eggs ($) When the price of eggs is $2 apiece, Beth chooses basket A, with 5 eggs. This information is recorded by point A 0 in the second panel. Points B 0 and C 0 are derived similarly. The curve through A 0 , B 0 , and C 0 is Beth ’ s demand curve for eggs. © Cengage Learning CONSUMERS IN THE MARKETPLACE 87 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience.
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