# An indifference curve is always. June 2019 CFA Level 1: CFA study reading 2019-03-04

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## The Indifference Curve: Meaning, Property and Assumption

These properties are Indifference curve slope downwards to right An indifference curve can neither be horizontal line nor an upward sloping curve. In that case indifference curve will touch one axis. The higher the indifference curves are, the larger the quantities of both goods. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C. This has nothing to do with the convexity of the preferences. If combination A is equal to combination C in terms of satisfaction, and combination B is equal to combination C, it follows that the combination A will be equivalent to B in terms of satisfaction. It is convex to the origin.

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## Indifference Curve: Concept, Properties, Features, Examples

Each basket gives her equal level of satisfaction. Correspondingly, equilibrium point will also shift right words as shown in the following figure. An indifference curve represents all the combinations, which provide same level of satisfaction. The classic indifference curve is drawn downward from left to right and convex to the origin, so that a consumer who is given a choice between any two points on it would not prefer one point over the other. In case of those complementary goods which are jointly demanded like bread and butter, shoes and socks. If he increases his consumption of X so as to reach the dotted portion of the I 1 curve horizontally from point S , he gets negative utility. Similarly all points on 0W are inferior to X.

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## The Indifference Curve: Meaning, Property and Assumption

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. In reality, commodities are not perfect substitutes or perfect complements to each other. Hicks to popularise this technique. A single indifference curve concerns only one level of satisfaction. It follows that if a consumer wants to have more quantity of commodity X, he will have to give up some quantity of commodity Y in order to derive the same level of satisfaction. If a consumer's income decreases, the budget constraint for Pepsi and pizza will a.

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## consumer theory

Check out the illustration below to see this. As he moves from combination A to 6 he gives up less quantity of Y in order to have more of X. In this case, indifference curves would either be completely flat if good x were the one of no consequence or completely vertical if good y yielded no value. If the indifference curve is convex without being strictly convex, then it is linear, i. The indifference curve analysis was developed by the British economist Francis Ysidro Edgeworth, Italian economist Vilfredo Pareto and others in the first part of the 20th century.

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## Four Properties of Indifference Curves

But there are a number of indifference curves, as shown in Figure 12. As a result, he is willing to give up less and less of bananas for each apple. . Also, two goods can never perfectly substitute each other. A Counter Example: In case of lexicographic orderings, an indifference curve does not exists in the true sense. Many core principles of appear in indifference curve analysis, including individual choice, marginal utility theory, income and substitution effects, and the subjective theory of value.

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## Four Properties of Indifference Curves

It is not an iso-utility curve. Since an individual can rank any of the baskets of goods and every point on the axiom panel represents one particular basket of goods, then every point should have one and only one indifference curve going through it. However, the theory assumes that a consumer can express utility in terms of rank. He is not supposed to purchase only one commodity. When considering her budget, the highest indifference curve that a consumer can reach is the a. The study of and are emphasized. Thus the indifference curve I 4 indicates a higher level of satisfaction than I 3 which, in turn, is indicative of a higher level of satisfaction than I 2 and so on.

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## What is Indifference Map? definition and meaning

This becomes pretty obvious if we look at the illustration below. This is an important feature of an indifference curve. In that case, the marginal rate of substitution is constant but still positive! Thus, indifference curve is always convex neither concave nor straight. Since the price of Apple has not changed, the consumer can purchase at the extreme 6 kg. The better substitutes the two goods are for each other, the closer the indifference curve approaches to the straight-line so that when the two goods are perfect substitutes, the indifference curve is a straight line. But one represents convex preferences and the other concave. The table given below is an example of indifference schedule and the graph that follows is the illustration of that schedule.

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## consumer theory

In such cases the indifference curve is a straight line at an angle of 45 degree with either axis. You probably enjoy having as much money as possible. However, it was brought into extensive use by economists J. Such a diagram is known as an indifference map where each indifference curve corresponds to a different indifference schedule of the consumer. Assume that a college student spends her income on Coke and Snickers. There is thus no indiffer­ence curve.

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## Four Properties of Indifference Curves

Properties of Indifference Curve: From the assumptions described above the following properties of indifference curves can be deduced. The less the ease with which two goods can be substituted for each other, the greater will be the fall in the marginal rate of substitution. Due to this assumption, an indifference curve is convex to the origin. If an indifference curve is bowed in toward the origin, the marginal rate of substitution is a. It means that as the amount X is increased by equal amounts that of Y diminish by smaller amounts.

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