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Applications Of Indifference Curves

 Chief Property of Indifference Curves

A higher indifference curve depicts a higher level of contentment than lower ones.

     This is the chief property of an indifference curve. This is otherwise termed as the combination which lie on a higher indifference curve will be opted to the combinations which lie on a lower indifference curve.

                    

    Let us assume the indifference curve IC1 and IC2 in the diagram. IC2 is a higher indifference curve than IC1. Combination I on the higher indifference curve IC2 will provide a consumer more contentment than combination K on the lower indifference curve IC1 for the reason that the combination I comprises of more of both commodities A and B than the combination K.

     Therefore, the consumer must opt I to K. And by transitivity presumption, he will opt any other combination such as combination J on IC2 to any combination IC1. We hence, bring to a close that a higher indifference curve depicts a higher level of contentment and combinations on it well be opted to the combination on a lower indifference curve.

Indifference Curves of Perfect Substitutes and Perfect Complements

     The scale of convexity of an indifference curves is based the rate of drop in the marginal rate of substitution of A and B. As mentioned above when two commodities are perfect surrogates of each other the indifference curve is a straight line on which marginal rate is substitution stay invariable. Straight line indifference curves of perfect surrogates are depicted.

     The better surrogates the two commodities are for each other, the closer the indifference curve approaches to the straight line so that when the two commodities are perfect surrogates, the indifference curve is a straight line. In case of perfect surrogate the difference curves are parallel straight line for the reason that the consumer equally opts the two commodities are perfect surrogates and is willing to negotiate one commodity for the other at an invariable rate.

    As one moves along a straight line indifference curve of perfect surrogates, marginal rate of substitution of one commodity for another remains invariable. The larger the drop in marginal rates of substitution the greater the convexity of the indifference curve. The less the effortlessness with which two commodities can be substituted for each other.

    At the extreme, when two commodities cannot at all be surrogated for each other, that is when the two commodities are perfect complementary commodities as for instance fuel and coolant in a four wheeler, the indifference curve will comprise of two straight lines with a right angle curved which is convex to the origin as the below diagram.

    Absolute complementary commodities are used in a definite fixed ratio. As will be observed in the diagram below, the left hand portion of a n indifference curve of the absolute complementary commodities is vertical straight line which depicts that an infinite amount of B is required to surrogate one unit of A and the right hand portion of the indifference curve is a horizontal straight line which means that an infinite amount of A is required to surrogate one unit of B.

     All this entails that the two absolute complements are used in definite fixed ratio and cannot be surrogated for each other. In the below diagram two absolute complements are consumed in the ratio 3A : 2B.

     Complements are therefore, those commodities which are used mutually in consumption so that their consumption enhances or declines simultaneously.

Second order condition for Consumer Symmetry

  1. A provided budget line must be digression to an indifference curve or marginal rate of substitution of A and B should be equivalent to the price ratio of the two commodities.
  1. Indifference curve must be convex to the original at the point of tangency.

The above description of consumer’s symmetry in regard to the distribution of his finance outlay on the purchases of two commodities has been entirely in terms of the consumer’s corresponding choices of the several combinations of two commodities. In this indifference curve analysis of consumer’s symmetry no use of cardinal utility logic has been made which entails that contentment or utility procured from the commodities is quantifiable in the quantitative sagacity.

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