indifference curve
Introduction
The indifference curve is a geometrical tool that has been used to swap for the neo-classical
cardinal utility conception. The indifference curve study measures efficacy in essence. It
portrays customer's mannerism in terms of his likings and penchants or standing for diverse
permutations of two products such as A and B. According to Watson, "An indifference schedule
is a list of permutations, preferring none of any other." A sole indifference curve concerns
just one stage of contentment.
Postulations of Indifference Curve
The indifference curve study holds some of the hypothesis of the Cardinal Theory discards others and devises its own.
- 1. The customers perform realistically so as to exploit contentment
- An indifference curve is even and incessant which means that the commodities are vastly separable and that levels of contentment also vary in an incessant manner
- The customer fixes up the two commodities in a degree of choices which means that he has both choice and indifference for the commodities.
- Both choice and indifference are transitive. If the permutation X is preferable to Y and Y to Z, then X is preferable to Z
- The customer is in a situation to instruct all feasible permutations of the two commodities
A higher indifference curve to
the right of another signifies a higher level of contentment
and preferable permutation of
the two commodities. In between two indifference curves there
can several other indifference
curves, one for every point in-between the spaces of two curves.
The Parameters set to
indifference curves are completely random. Numbers have no significance
in
the indifference curve swot. The
tilt of an indifference curve is negative, downward inclined and
from left to right means that
the customer to be indifferent to all the permutations on an
indifference
curve must leave less units of
good A in order to have more of B. An indifference curve can neither
touch nor intersect each other
so that one indifference curve passes through only one point on an
indifference map. An
indifference curve cannot touch either axis. It is curved to the origin.
The
convexity rule entails that as
the customer surrogates A for B, the marginal rate of substitution
reduces. It means that the
volume A is enhanced by the same volume of B reduced by smaller units.
The tilt of the curve becomes
lesser as we move to the right. Indifference curves are not essentially
parallel to each other. They are
like bangles. But as a substance of principle, their 'effective region'
is in the form of sections.
Marginal Rate of Substitution
The marginal rate of
substitution is the rate of swap amidst some units of commodities A and B
which
are uniformly preferred. The
marginal rate of substitution A for B (MRS)ab is the amount of B that
will
be missed for acquiring each
extra unit of A. This rate is explained below in the tablet below.
Permutations
|
A
|
B
|
MRS of A and B
|
1
|
1
|
18
|
-
|
2
|
2
|
13
|
5:1
|
3
|
3
|
9
|
4:1
|
4
|
4
|
6
|
3:1
|
5
|
5
|
4
|
2:1
|
6
|
6
|
3
|
1:1
|
To have the second permutation and yet to be at the same level of contentment, the customer is prepared to relinquish 5 units of B for acquiring an extra unit of A. The marginal rate of substitution of A for B is 5:1. The rate of substitution will then be the number of units of B for which one unit of A is a substitute. As the customer continues to have extra units of A, he is keen to give away less and less units of B so that the marginal rate of substitution falls from 5:1 to 1:1 in the sixth permutation. Prof. Hicks has defined it in these words - "suppose we start with a given quantity of commodities and then go on increasing the amount of A and diminishing that B in such a way that the customer is left neither better off nor worse off on balance then the amount of B which has to be subtracted in order to set off a second unit of A will be less than that which has to be subtracted in order to set off the first unit. In other words the more A is substituted for B, the less will be the marginal rate of substitution of A for B." Now let us construct the model representing marginal rate of substitution. (MRS)ab = Δ B / Δ A, at point o, (MRS)ab = mn/no and likewise other parameters are derived.
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