the slope of an indifference curve reveals: What does the slope of an indifference curve reveals?

The demand price which depends on the marginal utility of a good also declines as consumption increases, so quantity and price are inversely related, leading to the negative curve and the law of demand. People cannot really put a numerical value on their level of satisfaction. However, they can, and do, identify what choices would give them more, or less, or the same amount of satisfaction. An indifference curve shows all combinations of goods that provide an equal level of utility or satisfaction. When an individual consumes goods and services, the satisfaction gained or lost from consumption is called utility. Consumer preferences are defined by the consumption bundles that consumers face.

All of the indifference curves so far, whether steep or flat, have been convex to the origin. Perfect complementary goods are used in a certain fixed ratio. This property implies that an indifference curve has a negative slope. But, it will be a higher net utility than indifference curve I1. 7 The slope of an indifference curve reveals A the marginal… The slope of a consumer’s budget constraint represents the of buying one good in terms of the quantity of the other good the consumer gives up.

And on the higher indifference curve are market basket B and market basket C. That means that the consumer is equally satisfied between the consumption of market basket A and market basket C. However, that is not true, as the higher indifference curves are preferred to lower ones, which is why they can’t intersect. The diminishing marginal rate of substitution is the reason why the indifference curve is convex .

Indifference Curve

Let I be a continuous line joining the small circles and other similar points. He may prefer a to b or b to a or he may like both combinations equally well. In the last case we say that he is indifferent between them. It is not necessary at this stage to know how much utility is obtained from an apple or an orange. The consumer can compare the relative desirability of, or indifference between, two combinations of goods without knowing the exact amount of “utility” and “satis­faction” obtained from each combination.

It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities. Explain the subsititution and income effect of decrease in price? Substitution effect is the explanation for the downward slope of the aggregate damnd curve. The slope of an indifference curve reveals 1 A that… Transitive with respect to points on distinct indifference curves. Complete,such that all points on an indifference curve are ranked equally preferred and ranked either more or less preferred than every other point not on the curve.

Features Of Indifference Curve

If the amount of one product is decreased, the quantity of the other good must increase for the customer to experience the same level of satisfaction. The indifference map is a diagram that shows a set of indifference curves containing market baskets to which the individual is indifferent. The indifference curves are very useful because they are related directly to consumer choices and preferences.

Now take point on indifference curve IC2 and point B on indifference curve IC1 vertically below A. The slope of the indifference curve at any point is the negative marginal utility of good A as a proportion of the marginal utility of good B. It indicates that the optimal consumption bundle – the marginal rate of substitution between goods A and B – is the ratio of their prices.

So, he cannot be indifferent to the combinations. Similarly point C is better than point B and D is better than point C as the combinations differ giving the consumer greater satisfaction. Let us consider the logical inferences or conclusions if the indifference curve does not slope downwards from left to right.

Explain the subsititution and income effect of decrease in price?

Each point on the indifferent curve shows that the consumer derives the same utility and hence they are indifferent in terms of choice for the products. The marginal significance of x cannot be greater if the consumer travels dawn the curve enabling him to possess more of x commodities. The marginal significance of x should become smaller and smaller as he possesses larger and larger quantities of x. Since a concave curve violates the fundamental principle of economics, the indifference curve cannot be concave.

Thus, the slope of the indifference curve is called the marginal rate of substitution, which declines as the quantity of X increases relative to the quantity of Y. An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Now suppose that the level of the individual’s income increases without any change in prices. More of both commodities can now be consumed and the price ratio does not change, so the budget line shifts outward with the new budget line being parallel to the original one. This also tells us that the indifference curve analysis is only a two-dimensional analysis.

Because the individual is indifferent at different points of the indifference curve. Perfect complements’ indifference curves are right-angled. Perfect substitutes refer to products that are identical, and a consumer is, therefore, indifferent between them. Figure 3 shows the indifference curve of an individual that is choosing between Coffee and Pepsi while being equally satisfied at each point on the indifference curve.

When the https://1investing.in/ levels go down, the curve will shift down because the consumers will derive less utility from the combination of the pair of products. The indifference curve compares the utility of the products instead of the price and this shows the consumer choice for the product. As shown on the graph above, at any point, T, Good X is substitutable by Good Y. These points show the indifference between two goods. However, indifference cannot be found on any other point than the curve on the graph.

The Slope of the Indifference Curve

Different along the indifference curve b/c it has differenct slopes. The rate at which the consumer can trade one good for the other. There are, however, certain exceptions to rule 3. Under certain special circumstances an indifference curve may be a straight line or even concave to the origin. The change from A to B is purely due to the substitution effect and relative price change.

• A set of indifference curves can be upward sloping if we violate assumption number three; more is preferred to less.
• As in this case, option 1 can be eliminated simply because of this.
• The reason for this is that if a consumer wants to have more of one commodity, the other commodity must be slashed in a proportional amount.
• The indifference curves are very useful because they are related directly to consumer choices and preferences.
• In the last case we say that he is indifferent between them.

The slope of a consumer’s budget constraint represents the [] of buying one good in terms of the quantity of the other good the consumer gives up. How much of one good is required to compensate the consumer for giving up some of another good. The marginal utility the consumer receives from consuming an additional unit of a good. Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Along the curve, a consumer thus has an equal preference for the various combinations of goods shown. If a consumer purchases two goods, the budget limitation can be displayed with the help of a budget line on a graph.

A comprehensive, short-but-sweet overview of the slope of an indifference curve reveals Curves, a basic economic tool, that covers their purpose, types, and shape, using delicious candy as examples. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. You can read more at our privacy page, where you can change preferences whenever you wish.

Practice until you feel comfortable doing the questions. Which of the following are the goals of macroeconomic policy? 1 Encouraging economic growth 2 Low unemployment 3 Achievement of a balance between e… The currency in country X is the Krone while country Y uses the Euro.

An indifference curve is a downward sloping convex line connecting the quantity of one good consumed with the amount of another good consumed. Irish-born British economist Francis Ysidro Edgeworth first proposed this two-dimensional graph, also known as the iso-utility curve. The state at which a consumer derives maximum utility from the consumption of one or more goods and services given his/her level of income is called the consumer’s equilibrium. At that level of balance between total utility and income, the marginal utility of a product is equal to its one unit price. The main properties of the indifference curve are based on the basic assumptions of consumer choice theory.

Upper indifference curves indicate higher level of satisfaction. The Budget Line, also called Budget Constraint, shows all the combinations of two commodities that a consumer can afford at given market prices and within the particular income level. Each point on an indifference curve indicates that a consumer is indifferent between the two, and all points give him the same utility.

Once the consumer reaches this position he will not shift his purchase pattern, unless his income changes or unless the price of X or of Y becomes different. From this reasoning we can conclude that the equili­brium position of the consumer is at the point where the Consumption Possibility Line is the tangent of an Indifference Curve. This can be proved by showing that if two indifference curves on the same indifference map intersect, there is logical contradiction (or inconsis­tency). Suppose I1, and I2 intersect as in Fig 4.8, then from I1.

The choice of F with five books and 100 doughnuts is highly desirable, since it is on the highest indifference curve Uh of those shown in the diagram. However, it is not affordable given Lilly’s budget constraint. Choices B and G are both on the opportunity set. However, choice G of six books and 48 doughnuts is on lower indifference curve Ul than choice B of three books and 84 doughnuts, which is on the indifference curve Um.