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The Indifference Curve Theory - PART II

The Indifference Curve Theory - PART II
To derive Stipulation Curve From Price-Consumption Curve

The price consumption curve points out the diverse volume of a commodity purchased by a consumer when its price varies. The Marshallian stipulation curve demonstrates the diverse volume of a commodity stipulated by the customer at diverse prices, other things enduring the same. Set the consumer's money earnings and his indifference map, it is feasible to draw his demand curve for any commodity from the PCC. The conservative demand curve is simple to sketch from a set value stipulation agenda for a commodity, whereas the sketch of a stipulation curve from the PCC is rather intricate.

Postulations

This study has the following hypothesis. (a) The money to be spent by the customer is set invariable. It is valued $10. (b) The price of the commodity 'A' drops. (c) Prices of other allied commodities do not vary. (d) Consumer's likings and choices endure invariability. Let us construct the stipulation curve and price consumption curve.



In the above demonstration, money is taken as the vertical axis in dollars and commodity 'A' on the horizontal axis. PC, PC1 and PC2 are the budget lines of the customer on which E, F and G are the equilibrium positions forming the PCC curve. He buys OU, OV and OW unit of A correspondingly at these points on the PCC Curve. If the money earnings of the customer are divided by the number of commodities to be bought with it, we get per unit price of the commodity. For OU unit of A, he pays OP / OC price, for OV units, OP / OC1 price and for OW units, OP / OC2. This is in fact, the consumer's price stipulation schedule for Commodity A which is set in the below tablet.

Price Stipulation Schedule for Commodity A

Budget Line

Price of A

Quantity of A

PC

OP / OC = 10/2 = $5

OU = 1 unit

PC1

OP / OC1 = 10/5 = $2

OV = 4 units

PC2

OP / OC2 = 10/10 = $1

OW = 7 units


The price stipulation schedule for the consumer for the commodity A demonstrates that set his earnings OP $10 when he expends his earnings in buying OC quantity 2 units, it means that the price of A is OP / OC $5 as per the budget line PC at which the consumer buys OU that is one unit of commodity A. This is illustrated by the point E on the point Y1 curve. When the price of commodity A as determined by the budget line PC1 is OP / OC2 that is $1 on the budget line PC2 and the curve Y3 at point G, the consumer buys OW that is 7 units of A. Point E, F and G on the PCC Curve demonstrates the price quantity associations for commodity A. These points are plotted on the next picture. The price of A is taken on the vertical axis and the quantity stipulated on the horizontal axis. To sketch the stipulation curve from the PCC, sketch a perpendicular on the next picture from point E in the upper portion of the first picture which must pass through point U and likewise for the points V and W too. Similarly points R, S and T are drawn perpendicularly to the met points which must cut the points.

Substitutes and Compliments in the Indifference Curve

The indifference curve study is based on the supposition that there are two allied commodities which may be surrogates or complements. Pareto make cleared the relation amidst substitute and complementary commodities as reversible which means that if A is a substitute of B, B is a substitute of A and A is complement to B then B is complement to A. In this sense the form of indifference curve depends on whether the two allied commodities are perfect and imperfect substitutes or complements. If two commodities A and B are perfect substitutes the indifference curve is a straight line which is negative incline. In some cases the customer cannot differentiate amidst two commodities such as two brands of coffee. He believes both as the same commodity and is fanatical to purchase only one commodity. This is called monomania of that commodity. In the case of highly or close complementary commodities, the indifference curve has a sharp bend close to the crook of the curve.

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