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The Indifference Curve Theory - PART I

The Indifference Curve Theory - PART I
Introduction

The indifference curve is a geometrical tool that has been used to swap for the neo-classical cardinal utility conception. The indifference curve study measures efficacy in essence. It portrays customer's mannerism in terms of his likings and penchants or standing for diverse permutations of two products such as A and B. According to Watson, "An indifference schedule is a list of permutations, preferring none of any other." A sole indifference curve concerns just one stage of contentment.

Postulations of Indifference Curve

The indifference curve study holds some of the hypothesis of the Cardinal Theory discards others and devises its own.
  • 1. The customers perform realistically so as to exploit contentment

  • There are two commodities A and B

  • The customer possesses complete information about the prices of the commodities in the market.

  • The prices of the two commodities are set

  • The customer's likings, behaviour and earnings stay the same all through the study

  • He prefers more of A to less of B or vice versa

  • An indifference curve is negatively inclined downwards

  • An indifference curve is constantly curved to the source

  • An indifference curve is even and incessant which means that the commodities are vastly separable and that levels of contentment also vary in an incessant manner

  • The customer fixes up the two commodities in a degree of choices which means that he has both choice and indifference for the commodities.

  • Both choice and indifference are transitive. If the permutation X is preferable to Y and Y to Z, then X is preferable to Z

  • The customer is in a situation to instruct all feasible permutations of the two commodities
Properties of Indifference Curve

A higher indifference curve to the right of another signifies a higher level of contentment and preferable permutation of the two commodities. In between two indifference curves there can several other indifference curves, one for every point in-between the spaces of two curves. The Parameters set to indifference curves are completely random. Numbers have no significance in the indifference curve swot. The tilt of an indifference curve is negative, downward inclined and from left to right means that the customer to be indifferent to all the permutations on an indifference curve must leave less units of good A in order to have more of B. An indifference curve can neither touch nor intersect each other so that one indifference curve passes through only one point on an indifference map. An indifference curve cannot touch either axis. It is curved to the origin. The convexity rule entails that as the customer surrogates A for B, the marginal rate of substitution reduces. It means that the volume A is enhanced by the same volume of B reduced by smaller units. The tilt of the curve becomes lesser as we move to the right. Indifference curves are not essentially parallel to each other. They are like bangles. But as a substance of principle, their 'effective region' is in the form of sections.

Marginal Rate of Substitution

The marginal rate of substitution is the rate of swap amidst some units of commodities A and B which are uniformly preferred. The marginal rate of substitution A for B (MRS)ab is the amount of B that will be missed for acquiring each extra unit of A. This rate is explained below in the tablet below.

Permutations

A

B

MRS of A and B

1

1

18

-

2

2

13

5:1

3

3

9

4:1

4

4

6

3:1

5

5

4

2:1

6

6

3

1:1



To have the second permutation and yet to be at the same level of contentment, the customer is prepared to relinquish 5 units of B for acquiring an extra unit of A. The marginal rate of substitution of A for B is 5:1. The rate of substitution will then be the number of units of B for which one unit of A is a substitute. As the customer continues to have extra units of A, he is keen to give away less and less units of B so that the marginal rate of substitution falls from 5:1 to 1:1 in the sixth permutation. Prof. Hicks has defined it in these words - "suppose we start with a given quantity of commodities and then go on increasing the amount of A and diminishing that B in such a way that the customer is left neither better off nor worse off on balance then the amount of B which has to be subtracted in order to set off a second unit of A will be less than that which has to be subtracted in order to set off the first unit. In other words the more A is substituted for B, the less will be the marginal rate of substitution of A for B." Now let us construct the model representing marginal rate of substitution. (MRS)ab = Δ B / Δ A, at point o, (MRS)ab = mn/no and likewise other parameters are derived.


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