MEANING ,ASSUMPTIONS AND PROPERTIES OF INDIFFERENCE CURVE APPROACH

• INDIFFERENCE CURVES APPROACH
• MICRO ECONOMICS/ FOR NET UGC STUDENTS/CA AND CS FOUNDATION BUSINESS ECONOMICS
• INTRODUCTION TO INDIFFERENCE CURVE

1. ALSO CALLED ORDINAL UTILITY APPROACH
2. BETTER THAN CARDINAL UTILITY APPROACH WHICH WAS BASED ON UNREALISTIC ASSUMPTIONS
3. ORDINAL UTILITY TECHNIQUES IS BASED ON COMPARABILITY OF THE UTILITIES
4. FIRST GIVEN BE EDGEWORTH AND PARETO
5. FURTHER DEVELOPED BY R.G.D ALLEN AND J.R HICKS

•  MEANING
• AN INDIFFERENCE CURVE IS A CURVE WHICH SHOWS DIFFERENT COMBINATIONS OF TWO COMMODITIES YIELDING EQUAL SATISFACTION TO THE CONSUMER. IT MEANS ALL THE POINTS LOCATED ON AN INDIFFERENCE CURVE REPRESENT SUCH COMBINATIONS OF TWO COMMODITIES GIVE EQUAL SATISFACTION TO THE CONSUMER. A CONSUMER BECOMES INDIFFERENT ABOUT CHOICE.
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• LEFTWITCH,” A SINGLE INDIFFERENCE CURVE SHOWS THE DIFFERENT COMBINATION OF X AND Y THAT YIELD EQUAL SATISFACTION TO THE CONSUMER.
• FERGUSON,” AN INDIFFERENCE CURVE IS COMBINATION F GOODS.EACH OF WHICH YIELD THE SAME LEVEL OF TOTAL UTILITY OR TO WHICH THE CONSUMER IS INDIFFERENT..
• DEFINITION
• HANDERSON AND QUANDT,” THE LOCUS OF ALL COMMODITY COMBINATIONS FROM WHICH THE CONSUMER DERIVES THE SAME LEVEL OF SATISFACTION FORMS AN INDIFFERENCE CURVE
• KOUTSOYIANNNIS,” AN INDIFFERENCE CURVE IS THE LOCUS OF POINTS WHICH SHOWS DIFFERENT COMBINATIONS OF GOODS WHICH YIELD THE SAME UTILITY TO THE CONSUMER SO THAT HE IS INDIFFERENT AS THE PARTICULAR COMBINATION HE CONSUMES.
• AN INDIFFERENCE CURVE IS A CURVE WHICH SHOWS DIFFERENT COMBINATIONS OF TWO COMMODITIES YIELDING EQUAL SATISFACTION TO THE CONSUMER. IT MEANS ALL THE POINTS LOCATED ON AN INDIFFERENCE CURVE REPRESENT SUCH COMBINATIONS OF TWO COMMODITIES GIVE EQUAL SATISFACTION TO THE CONSUMER. A CONSUMER BECOMES INDIFFERENT ABOUT CHOICE.

• INDIFFERENCE SCHEDULE
• INDIFFERENCE SCHEDULE IS A SCHEDULE WHICH REPRESENT COMBINATIONS OF  TWO GOODS WHICH YIELD EQUAL SATISFACTION TO THE CONSUMER AND A CONSUMER IS INDIFFERENCE
• INDIFFERENCE SCHEDULE
• EXPLANATION
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• DIAGRAM

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• INDIFFERENCE MAP
• INDICATES DIFFERENT COMBINATIONS OF TWO COMMODITIES WHICH YIELD A GIVEN LEVEL OF SATISFACTION TO THE CONSUMER. INDIFFERENCE MAP IS COLLECTION OF VARIOUS INDIFFERENCE CURVES. HIGHER THE INDIFFERENCE CURVE HIGHER THE LEVEL OF SATISFACTION.
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• LAW OF DIMINISHING MARGINAL RATE OF SUBSTITUTION
• MARGINAL RATE OF SUBSTITUTION : IS THE RATE AT WHICH THE CONSUMER CAN SUBSTITUTE ONE GOOD FOR ANOTHER WITHOUT CHANGING THE LEVEL OF SATISFACTION. IT DETERMINES THE SLOPE OF INDIFFERENCE CURVE.
• PROF BILAS ,” THE MARGINAL RATE OF SUBSTITUTION OF X FOR Y IS DEFINED AS THE AMOUNT OF Y THE CONSUMER IS JUST WILLING TO GIVE UP TO GET ONE MORE UNIT OF X AND MAINTAIN THE  SAME LEVEL OF SATISFACTION.
• MRS_XY = LOSS OF Y/GAIN OF X = -∆Y/∆X

• LAW OF DIMINISHING MARGINAL RATE OF SUBSTITUTION
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•  FUNDAMENTAL ASSUMPTIONS

1. RATIONAL CONSUMER:GIVEN THE PRICES HE WILL CHOOSE THE COMBINATION THAT YIELD HIM MAXIMUM SATISFACTION
2. ORDINAL UTILITY:CONSUMER IS CAPABLE OF MEASURING DIFFERENT LEVELS OF SATISFACTION. UTILITY CAN BE EXPRESSED FIRST,SECOND,THIRD SO ON
3. DIMINISHING MARGINAL RATE OF SUBSTITUTION: STOCK OF COMMODITY INCREASES WITH HE SUBSTITUTE IT FOR THE OTHER  COMMODITY AT DIMINISHING RATE
4. NON SATIETY : DOES NOT POSSESS ANY GOODS IN MORE THAN THE REQUIRED QUANTITY. HE DOES NOT REACH THE LEVEL OF SATIETY. CONSUMERS PREFER MORE QUANTITY OF GOODS TO LESS QUANTITY

5. TWO GOODS MODEL
6. ASSUMPTION OF CONTINUITY:-CAPABLE OF CONCEIVING ALL THE COMBINATIONS
7. SCALE OF PREFERENCE :-ARRANGES THE TWO GOODS IN A SCALE OF PREFERENCE WHICH MEANS HE HAS BOTH PREFERENCE AND RANKIN
8. BASED ON WEAK ORDERING WHICH RECOGNIZE THE RELATION OF PREFERENCE AND INDIFFERENCE
9. CONSISTENCY IN SELECTION :-IF A> B ,THEN B /> A
10. TRANSITIVITY WITH REFERENCE TO PREFERENCE. IF A COMBINATION A IS PREFERRED TO B,AND B TO C AND C TO D AND THEN A IS PREFERABLE TO D

• PROPERTIES OF INDIFFERENCE CURVE
• GENERALLY SLOPES DOWNWARD FROM LEFT TO RIGHT
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• INDIFFERENC CURVE HAS A NEGATIVE SLOPE FROM LEFT TO RIGHT BASED ON THIS ASSUMPTION IF THE CONUSMER USES MORE QUANITY OF ONE GOOD HE HAS TO REDUCE THE UNITS OF OTHERS GOODS IN ORDER TO REMAIN ON THE SAME LEVEL OF SATISFACTION.
• ITS SHAPE CAN NOT BE  HORIZONTAL TO X AXIS,VERTICAL TO Y AXIS  OR UPWARD SLOPING CURVE
• CONVEX TO THE POINT OF ORIGIN
• SHAPE OF THE INDIFFERENCE CURVE CONVEX TO THE POINT OF ORIGIN:
• SHAPE OF INDIFFERENC CURVE CAN NOT BE CONCAVE OR STRAIGHT LINE SLOPING FROM DOWN TO RIGHT.
• THE PROPERTY OF THE INDIFFERENCE CURVE IS BASED ON THE PRINCIPLE OF DIMINISHING MARGINAL RATE OF SUBSTITUTION’ AS THE X UNITS INCREASED BY EQUAL AMOUNT,THE Y DIMINISHES BY SMALLER AMOUNT
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• TWO INDIFFERENCE CURVE CAN NEVER INTERSECT EACH OTHER
• EACH INDIFFERENCE CURVE REPRESENT DIFFERENT LEVEL OF SATISFACTION. IF TWO INDIFFERENCE CURVE CUT EACH OTHER THEN THIS SITUATION LEADS TO SELF CONTRADICTORY RESULTS.
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• HIGHER INDIFFERENCE CURVE INDICATES HIGHER LEVEL OF SATISFACTION

• INDIFFERENCE CURVE NEED NOT PARALLEL TO EACH OTHER
• MAY OR MAY NOT BE PARALLEL TO EACH OTHER. IF THE MARGINAL RATE OF SUBSTITUTION OF DIFFERENT POINT ON TWO CURVE IS THE SAME THEN THE CURVE PARALLEL TO EACH OTHER OTHERWISE THEY WILL NOT BE PARALLEL TO EACH OTHER.
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• INDIFFERENCE CURVE DOES NOT TOUCH EITHER X AXIS OR Y AXIS BECAUSE OF THE ATTRIBUTE OF TWO COMMODITY MODEL. BUT INDIFFERENCE CURVE MAY TOUCH  THE Y  AXIS IF THE MONEY IS SHOWN ON Y AXIS AND COMMODITY ON X AXIS.
• INDIFFERENCE CURVE  BECOMES COMPLEX IN CASE OF MORE THAN TWO GOODS, THREE DIMENSIONAL DIAGRAMS