INDIFFERENCE

CURVE

MEANING :-

An

indifference curve is a curve

which shows different
combinations of two
commodities having equal
satisfaction to the consumer .

As

all combination on IC
have equal satisfaction , a
consumer becomes
indifferent about their
choices .

INDIFFERENCE SCHEDULE
MEANING :_
It

refers to a table showing different

combinations of 2 commodities
which gives equal satisfaction .

SCHEDULE IS AS FOLLOWS :combinations

Grapes(x)

Oranges (y)

MRS =Y/X

20

--

14

6Y:1X

5Y:1X

4Y:1X

2Y:1X

EXPLANATION :If the consumer increased the quantity of

x quantity of y must be decreased at a
diminishing rate. If the consumer wants to
buy 2 units of x he will have to buy less of
y. So in B combination consumer buys 14
units of y and 2 units of x which gives him
equal satisfaction. This table contains 5
combinations and each of them provide
equal satisfaction to the consumer.

WHAT IS AN INDIFFERENCE CURVE?

This

IC is downward sloping curve from left to

right it shows if consumer want to purchase more
of x he has to sacrifice y to keep satisfaction level
same .

This

curve never touches any axis because

consumer has to consume both the commodities .
IC is convex to the origin because of diminishing
MRS .

PROPERTIES : Always

downward
sloping.

IC

is always
convex to the
origin.

 IC never intersect
each other as each
IC represent different
levels of satisfaction.

Higher IC
provides higher
level of satisfaction

REASONS FOR DIMINISHING MRS : This

is because of law of diminishing

marginal utility . With increasing
consumption of x its marginal utility
falls so he would be willing to sacrifice
less of y for x . The falling rate of
sacrifice is known as DIMINISHING
MARGINL RATE OF SUBSTITUION OR
CONVEX PREFERNCES .

MONOTONIC PREFERENCES
This

means more the quantity

consumed by the consumer more utility
he gets .

JOHN HICKS

Sir John Richard Hicks(8

April 1904 20 May 1989)
was a
Britisheconomistand one
of the most important and
influential economists of
the twentieth century. The
most familiar of his many
contributions in the field of
economics were
thecompensated demand
functiona.k.a. Hicksian
demand function in his
memory.

HICKSIAN APPROACH
FOR NORMAL,
INFERIOR AND GIFFEN
GOODS
Hicksian demand functionis the
demand of a consumer over a bundle of
goods that minimizes their expenditure
while delivering a fixed level of utility.

PREREQUISITES
What is the 'Substitution Effect'
The substitution effect is the economic understanding that
as prices rise or income decreases consumers will
replace more expensive items with less costly alternatives.

What

is the Income Effect

Theincome effectin economics can be defined as the
change in consumption resulting from a change in real
income. Thisincomechange can come from external
sources, or fromincomebeing freed up or soaked up by
a decrease or increase in the price of a good that money
is being spent on.

Assumptions

1.

The consumer is rational - This means that

the consumer aims at maximizing satisfaction
i.e. the consumer wants to reach at the highest
point on the indifference curve.

Utility

is expressed ordially It means

that utility is expressed in terms of ranking
i.e. 1st, 2nd, 3rd etc and not in unitary terms
like 1, 2, 3 etc.
Utility

is an increasing function of
consumption This basically means that
the more the quantity of a good is consumed
more will be the total utility derived. Such
preferences are called monotonic
preferences

Marginal rate of substitution decreases

continuously - As a consumer consumes more and
more units of a good, the rate at which he is willing
to sacrifice the another good to get an extra unit of
this good goes on decreasing. In other words law of
diminishing marginal utility operates.

HICKSIAN APPROACH FOR

NORMAL GOODS

NORMAL GOODS:
Ineconomics,normal goodsare anygoodsfor
whichdemandincreases when income increases, and
falls when income decreases but price remains
constant, i.e. with a positiveincome elasticity of
demand.

With the fall in the price.

Consumer becomes
relatively
richer (real income
increases).
Good is normal,
therefore, consumer
will buy more of this
good.

Thus the quantity

demanded moves from
x to x1
substitution and income effect for mormal
goods.

HICKSIAN APPROACH FOR

INFERIOR GOODS
INFERIOR GOODS:
Aninferior goodis a good that decreases in demand when
consumer income rises or rises in demand when consumer income
decreases. Inferior good is often associated with lower socioeconomic groups.

With the fall in the price.

Consumer becomes
relatively
richer (real income
increases).
Good is inferior, therefore,
consumer
will buy less of this good.
Income effect causes a
reduction in quantity
demanded
Substitution effect causes
an increase in the
quantity

Substitution and income effect for inferior

goods.

Now since the substitution

effect is relatively more
than income effect
Therefore, increase in
quantity demanded

HICKSIAN APPROACH FOR

GIFFEN GOODS
Giffen Goods:

AGiffen goodis a product that people

consume more of as the price rises and
vice versaviolating thelaw of demand.
A Giffen good is so strongly aninferior
good that this contrary income effect
more than offsets the substitution
effect, and the net effect of the good's
price rise is to increase demand for it.

With the fall in the price.

Consumer becomes
relatively
richer (real income
increases).
Good is giffen, therefore,
consumer
will buy more of this good.
Income effect causes a
reduction in quantity
demanded
Substitution effect causes
an increase in the quantity

Substitution and income effect for inferior

goods.

Now since the income effect

is relatively more than
substitution effect
Therefore, increase in
quantity demanded