12689_onsumer preference & indifference curves (2)

8/8/2019 12689_onsumer Preference & Indifference Curves (2)

1/22

PREFERENCES: WHAT THE

CONSUMER WANTS All wants of a consumer cannot be fulfiled with

limited resources. So a consumer ranks up his

desires and builds up a scale of preferences.

A consumers scale of preferences is

independent of the prices ruling in the market.

A consumer is striving hard to reach a level of

equilibrium i.e. a position in which he derivesmaximum satisfaction from the use of money at

his disposal.


2/22

Consumer preference :

assumptions Ordinal Utility

Consistency

Transitivity

A consumers scale of preference is

independent of his income , prices of the goods

in the market , and scale of preferences of

another consumer. A consumer prefers more to less.

One combination can be substituted for another.

Indifference curve is convex to the origin and

shows diminishing marginal rate of substitution.


3/22

PREFERENCES: WHAT THE

CONSUMER WANTS A consumers preference among

consumption bundles may be illustrated

with indifference curves.


4/22

INDIFFERENCE CURVE

An indifference curve is a locus of all such

points which show different combinations

which yield equal satisfaction to theconsumer.

On the indifference curve the consumer

becomes indifferent about his choice.


5/22

Figure 2 The Consumers Preferences

Quantity

of Pizza

Quantityof Pepsi

0

Indifference

curve, I1

Copyright2004 South-Western


6/22

SLOPE OF INDIFFERENCE

CURVE The Marginal Rate of Substitution

The slope at any point on an indifference

curve is the marginal rate of substitution.

It is the rate at which a consumer is willing to trade

one good for another.

It is the amount of one good that a consumer

requires as compensation to give up one unit of

the other good.


7/22

Law of Diminishing Marginal Rate

of Substitution Acc to the law , as a consumer gets more

and more units of X , he will be willing to

give up less and less units of Y. In other words, MRS of X for Y will go on

diminishing while the level of satisfaction

of the consumer remains the same.


8/22


Quantity

of Pizza

Quantityof Pepsi

0

Indifference

curve, I1

I21

MRS

C

B

A

D



9/22

PROPERTIES OF INDIFFERENCE

CURVE Indifference curves are downward sloping.

Indifference curves do not cross.

Indifference curves are bowed inward. Higher indifference curves are preferred to

lower ones.


10/22

Property 1:

Indifference curves are downward sloping.

A consumer is willing to give up one good

only if he or she gets more of the other good

in order to remain equally happy.

If the quantity of one good is reduced, the

quantity of the other good must increase.

For this reason, most indifference curvesslope downward.


11/22


Quantity

of Pizza

Quantityof Pepsi

0

Indifference

curve, I1



12/22

PROPERTY 2

Indifference curves are convex to the

origin.

This property is based on the law ofdiminishing marginal utility.


13/22

Figure 4 Bowed Indifference Curves

Quantity

of Pizza

Quantityof Pepsi

0

Indifference

curve

8

3

A

3

7

B

1

MRS= 6

1

MRS=14

6

14

2



14/22

PROPERTY 3

Higher indifference curves are preferred to

lower ones.

Consumers usually prefer more of somethingto less of it.

Higher indifference curves represent larger

quantities of goods than do lower indifference

curves.


15/22


Quantity

of Pizza

Quantityof Pepsi

0

Indifference

curve, I1

I2

C

B

A

D



16/22

PROPERTY 4

Indifference curves do not intersect.

Points A and B should make the consumer

equally happy.

Points B and C should make the consumer

equally happy.

This implies that A and C would make the

consumer equally happy. But C has more of both goods compared to A.


17/22

Figure 3 The Impossibility of IntersectingIndifference Curves

Quantity

of Pizza

Quantityof Pepsi

0

C

A

B



18/22

Two Extreme Examples of

Indifference Curves

Perfect substitutes Perfect complements


19/22

Two Extreme Examples of Indifference

Curves

Perfect Substitutes

Two goods with straight-line indifference

curves are perfect substitutes.

The marginal rate of substitution is a fixed

number.


20/22

Figure 5 Perfect Substitutes and PerfectComplements

PEPSI0

COKE

(a) Perfect Substitutes

I1 I2 I3

3

6

2

4

1

2



21/22

Two Extreme Examples of Indifference

Curves

Perfect Complements

Two goods with right-angle indifference

curves are perfect complements.


22/22

Figure 5 Perfect Substitutes and PerfectComplements

Right Shoes0

Left

Shoes

(b) Perfect Complements

I1

I2

7

7

5

5


12689_onsumer preference & indifference curves (2)

Documents