Indifference curve analysis does not attempt to measure satisfaction in cardinalnumbers but is based on ranking consumer satisfaction in order of preferences using ordinal numbers.
An indifference curve is a graphical representation showing different combinations of commodities which yield to the consumer the same level of satisfaction.
Consumers may not be satisfied with their optimal consumption choice.
Consumers may not have perfect knowledge.
Consumers are not always rational.
The optimal consumption choice may not in practice give consumers maximum satisfaction.
Under indifference curve analysis, the consumer considers all possible combinations of goods and service which he/she can afford and subsequently chooses the combination which is the most preferred.
The choice framework of indifference curves and the consumer budget line represents the consumer's preferences.
On the curve, point ABCD represent the consumption bundles.
On the graph, Point A bundle comprises 4 units of good X and 20 units of good Y.
Point B bundle comprises 8 units of goods x and 10 units of good y.
The consumer would have the same preference for either combination A or B.
The same thing applies to all the other consumption bundles along this curve such as C and D.
There are two goods X and Y in indifference curve analysis.
The consumer acts rationally so as to maximise satisfaction in indifference curve analysis.
Any combination of both goods yield the samelevel of satisfaction in indifferencecurve analysis.
The consumer’s tastes, habits and income remain the same in indifference curve analysis.
The rate of exchange between both goods is called the marginal rate of substitution in indifference curve analysis.
An indifference map shows a whole set of indifference curves.
The further away a particular curve is from the origin the higher the level of satisfaction it represents in an indifference map.
Total price effect consists of income effect and substitution effect.
By drawing a parallel budget line M2N2, we are eliminating the income effect.
When price of good X (Px)falls, the consumer tends to increase consumption of good X as a result of substitution effect.
When good X is a Giffen good then also substitution and income effects work in opposite directions.
The magnitude of change in units of good X on account of the substitution effect is less than the income effect.
Individual indifference curve analysis demonstrates the logics of rational consumer choice, the derivation of the individual indifference curve and the income and substitution effect without having to measure utility.
The final price effect is positive when a good is normal.
The price effect, the final outcome, is therefore negative.
Income effect here is negative.
The price effect then depends on relative magnitude of the two effects.
When good X is an inferior good, then the substitution and income effects work in opposite directions.
The final price effect is positive for inferior goods, as change in the consumption of good X as a result of the substitution effect is greater than the income effect.
The consumer again moves to another equilibrium point E2.
Consumer choice may be influenced by advertisement.
At E2, the quantity demanded of commodity X increases by X1X 3.
The consumer tends to increase consumption of Good X with fall in its price.
Indifference curves are an infinite number of indifference curves on the same set of axes; collectively these are called indifference map.
Indifference curves are downward sloping which means you have to give up more of a commodity to obtain more of another commodity.
The slope measures the rate at which the customer is willing to substitute good x for good y so as to leave satisfaction unchanged in indifference curve analysis.
Plot the budget lines when income is assumed to be $10 and also when income increases to $20.