Indifference Curve (I.C)
A British economist “France Edge Worth” introduced the concept of indifference curve first time in 1881. In 1906 an Italian economist “Peveto” explains it with some changing. But in 1930 Professor Hicks explained the concept of I.C in detail. The modern economist said that it is an ordinal measurement of utility, because utility is explained in ordinal numbers like first, second, tenth etc.
Indifference curve is the locus of all such points, which represents the different combinations of two commodities like x, and y, which provides the same level of satisfaction to the consumer. The consumer is indifferent among these combinations as the satisfaction is same.
MAP OF INDIFFERENCE CURVE:
A set of indifference curves is known as the map of indifference curves. The main characteristic of such indifference curves is that the higher indifference curve shows higher satisfaction and lower indifference curve shows the less satisfaction.
MARGINAL RATE OF SUBSTITUTION (MRS):
Slop of the indifference curve is known as MRS. Simply the rate of change between two commodities x and y is called MRS. In other words, the amount of good X a consumer will scarify in order to get one unit of good Y is known as MRS.
MRS xy = y/x = dy/ dx
Budget line is a curve which represents the different combinations of two commodities x and y, which a consumer can purchase with his given income.
Slope of the budget line represents the price ratios of the two commodities X and
iTechnically a consumer is to be in equilibrium when he spends his income on the purchase of different commodities in such a way that his total satisfaction is maximum possible. In terms of indifference curve approach the consumer willbe in equilibrium when these conditions will be fulfilled.
Conditions of Equilibrium:
The budget line must be to the highest possible indifference curve.
At the point of equilibrium the marginal rate of substitution is equal to the price ratio: e.g. MRS xy = Px/Py...
The indifference curve should be convex to the origin.
EXPLAINATION OF CONSUMER’S EQUILIBRIUM:
With the reference to the indifference curve the consumer would be in equilibrium when he would purchase the combination that lie on the highest indifference curve, which can reach through his income. This point must lie on his budget line so that he would be able to purchase the combination, which would give him greater satisfaction. This can be explained with the help of diagram.
Here DD is a budget line. Point E is the equilibrium point where consumer attains equilibrium and his satisfaction is maximum. The consumer is not in equilibrium at B and A points because here the conditions of equilibrium does not fulfill. Accordingly the consumer purchases OXe of X and OYe of Y and gains the maximum satisfaction.
So the consumer would be in equilibrium where his budget line is tangent to the highest indifference curve which he can reach with his given income and at that point the MRS xy is equal to the price ratio.
MRS xy = Px/Py......
Following are the assumption of the indifference curve.
A consumer substitutes commodities rationally in order to maximize his/her level of satisfaction.
Utility is Ordinal:
A consumer can rank his/her performance according to the satisfaction of each basket of goods. A consumer is required an ordinal measurement of utility.
The indifference curves are convex to the origin, which implies that the slope of the I.C decreases. This slope of I.C is also called MRS of the goods.
It is assumed that each of the good is divisible.
Knowledge of Price:
It is assumed that the consumer has full knowledge of prices in the market.
The consumer’s scale of preference is so complete that consumer is indifferent between them.
CRITICIZM ON I.C:
Following are the limitations of I.C.
Change in Consumer’s Taste:
It is assumed that there is no change in consumer’s taste but it is practically not possible.
It is assumed that I.C is smooth and continues which is wrong.
Consumer is not Rational:
The assumption of rational consumer is not true because a consumer usually acts under various social, economic level disabilities.