Learn about the Indifference Curve Theory in economics, how it impacts consumer behavior, and its applications in decision-making processes.

Indifference Curve Theory In Economics

1. The locus of all commodity combinations from which the consumer drive the same level of utility or satisfaction forms an indifference curve.
2. An indifference curve is a locus of points particular combinations or bundles of goods which yield the same level of utility to the consumer so that he is indifferent as to the particular combination he consumes.
3. Indifference curve is that curve which shows the same level of satisfaction ffom combination of two commodities x, y.

I.C = f (x.y)

Concept:

Substitute:

Two goods are substituable when one decreases then other increases (inverse relationship)

Same level of satisfaction:

It means there is no change in the total utility, it remains the same.

* Combination:

x = f (y) or y =f (x)

Curve:

Curve is a part of a circle.

Tangent Line:

A line which touches a circle at one point is called tangent line.

“Indifference curve is that curve which shows constant level of satisfaction.”

Assumptions of Indifference Curve
Theory

1. Rationality:

The consumer is assumed to be rational. He aims at the maximization of his utility given his income and market prices. It is assumed that he has full knowledge of all relevant information.

2. Utility is Ordinal:

It is taken an automatically true that the consumer can rank his preferences according to the satisfaction of each basket. He need not know precisely the amount of satisfaction. It is not necessary to assume that utility is cordially measurable. Only ordinal measurement is required.

3. Diminishes Marginal Rate of Substitution:

Preferences are ranked in terms of indifference curves, which are assumed to be convex to the origin. The slope of the indifference curve is called the marginal rate of substitution of commodities. The indifference curve theory is based thus on the axiom of diminishing marginal rate of substitution.

4. Total Utility Depends on Quantities:

The total utility of the consumer depends on quantities of the commodities consumed.

u = f (qi, q₂,….. q_x, q_y….. q_n)

5. Consistency And Transitivity of Choice:

It is assumed that the consumer is consistent in his choice that is if one period he chooses bundle A over B he will nor choose B over A in another period If both bundles are

available to him. The consistency assumption may be symbolically written as follows:

If A> B then B> A

6. Similarly it is assumed that consumer’s choices are characterised by transitivity. If bundle A is preferred to B and B is preferred to^C. thenjDundle A is preferred to C.

If A > B and B > C/theri A\> C _

Properties of Indifference Curve:

1. Negative Slope:

An indifference curve has a negative slope which denotes that if the quantity of one commodity (y) decreases the quantity of the other (x) must increase if the consumer is to stay on the same level of satisfaction.