INDIFFERENCE CURVE ANALYSIS :

ORDINAL UTILITY APPROACH

 The technique of indifference curves was originated by Francis Y.

Edgeworth in England in 1881. It was then refined by Vilfredo Pareto,
an Italian economist in 1906. This technique attained perfection and
systematic application in demand analysis at the hands of Prof. John
Richard Hicks and R.G.D. Allen in 1934.
Hicks discarded the Marshallian assumption of cardinal measurement
of utility and suggested ordinal measurement which implies
comparison and ranking without quantification of the magnitude of
satisfaction enjoyed by the consumer .
Professor Hicks introduced the concept of scale of preferences of a
consumer as the base of indifference curve technique. The
conceptual arrangement of different goods and their combinations in
a set order of preferences is called the scale of preferences.

Definition :
An indifference curve is the locus of points representing all the
different combinations of two goods which yield equal level of
satisfaction to the consumer.

Indifference Schedule :
Indifference schedule is a list of various combinations of
commodities which are equally satisfactory to the consumer
concerned.

Indifference Schedule:
Combinations

Apples

Mangoes

15

11

Indifference curve IC shows all possible combinations of apples and

mangoes between which a person is indifferent. Point A shows
consumption bundle consisting of 15 apples and one mango. Moving
from point A to Point B, we are willing to give up 4 apples to get a
second mango (total utility is the same at points A and B).

Assumptions
Rational behavior of the consumer
Utility is ordinal
Diminishing marginal rate of substitution
Transitivity in choice making
Goods consumed are substitutable
He is able to rank his preference

Indifference Map :
A graph showing a whole set of indifference curves is called an
indifference map. All points on the same curve give equal level of
satisfaction, but each point on higher curve gives higher level of
satisfaction.

Properties of indifference curves :

Indifference curves are negatively sloped

Given a combination of commodity X and commodity Y, with every
increase in X, the amount in Y should fall in order that the level of
satisfaction from every combination should remain the same.

Indifference curves are convex to the origin

Convexity illustrates the law of diminishing marginal rate of substitution.

Indifference curves can never intersect each other

Indifference curves can never intersect each other because each
indifference curve represents a specific level of satisfaction. If two
indifference curves intersect each other, then at the point of intersection,
the consumer is experiencing two different levels of utility.

Consumer Equilibrium
A consumer seeks a market basket that generates the maximum
level of happiness. However, ones money income and prices of
goods imposes a limit on the level of satisfaction that one may
attain. Thus, the income at the disposal of the consumer in
conjunction with prices of the commodities will determine the
budgetary constraint or the price line.

 Consumer equilibrium is attained when, given his budget constraint,

the consumer reaches the highest possible point on the indifference
curve. The maximum satisfaction is yielded when the consumer
reaches equilibrium at the point of tangency between an indifference
curve and the price line. At point E, the price line is tangent to the
indifference curve.
At the equilibrium point, slope of indifference curve = slope of price
line
.