Topic 1: Indifference Curves
The horizontal and vertical axes are used to measure an individual’s consumption of commodities X and Y. Think of indifference curves as a smooth surface that rises as the consumers’ consumption of these commodities rises.
Economists assume that an individual’s utility can be expressed as a function of the quantities of commodities X and Y consumed in the simple case depicted in the two Figures above. Analytical extensions of this sort are, of course, extremely difficult if not impossible to successfully pursue. Equation 1 states that the marginal utility of X decreases as the quantity of Y increases.
The indifference map in Figure 3 assumes that both X and Y are normal goods. If an individual spent his entire income on commodity X, the amount of X purchased would now be higher; however, since the price of good Y has not changed, neither has the maximum possible consumption of that commodity.
Is the utility function the indifference curve?
Indifference curves and utility functions are inextricably linked; in fact, since indifference curves graphically represent preferences and utility functions mathematically represent preferences, indifference curves can be derived from utility functions.
How is indifference curve related to utility?
An indifference curve is a graph that depicts the combination of two goods that provide the consumer with equal satisfaction and utility; each point on the curve indicates that the consumer is indifferent between the two, and all points provide him with the same utility.
Where can I draw an indifference curve?
On a budget constraint diagram, an indifference curve depicts the tradeoffs between two goods, with all points along the curve providing the same level of utility. Higher indifference curves represent higher levels of utility.
Why can’t indifference curves cross?
Because the higher indifference curve will give as much of the two commodities as the lower indifference curve at the point of tangency, we conclude that indifference curves cannot cut each other.
What does a utility function tell you?
In economics, the utility function is a key concept that measures consumer preferences across a range of goods and services. Utility refers to the satisfaction consumers feel after selecting and consuming a product or service.
What is the equation of an indifference curve?
If we rewrite the equation of an indifference curve U(t, y)=c in the form y=g(t, c), then g(t, c) is a decreasing and convex function of t for given c.
What is budget line and indifference curve?
An indifference curve is a line that shows all the combinations of two goods that give a consumer equal utility, or that the consumer would be indifferent to these different combinations.
What is the other name of indifference curve?
The diagram depicts an Indifference Curve (IC), which gives the same level of consumer satisfaction to any combination lying on it. It is also known as the Iso-Utility Curve.
What is marginal utility curve?
The law of diminishing marginal utility states that the additional utility decreases with each unit added. This is an example of the marginal utility curve, which shows how marginal utility decreases as consumption of a good increases.
What is the slope of an indifference curve?
The MRS is the rate at which a consumer is willing to trade one good for another; if a consumer values apples, for example, the rate of substitution will be slower, and the slope will reflect this rate of substitution.
Can an indifference curve be upward sloping?
If we violate assumption number three, more is preferred to less, a set of indifference curves can be upward sloping, indicating that one of the goods is a “bad” in the sense that the consumer prefers less of the good over more of the good.
Is Mrs positive or negative?
The MRS is always negative for downward-sloping convex indifference curves that result from well-behaved preferences, and it always decreases (becomes greater in absolute value) as the amount of good x decreases.
Why indifference curve is negatively sloped?
Because if a consumer wants more units of one commodity, he must reduce the number of units of the other due to his limited income, an indifference curve always slopes downward from left to right, i.e. it has a negative slope.