indifference curve

Examples of indifference curve in the following topics:

• Properties of Indifference Curves

  • Almost all indifference curves will be negatively sloped, convex, and will not intersect.
  • Indifference curves trace the combination of goods that would give a consumer a certain level of utility.
  • Indifference curves are always negatively sloped.
  • This is manifested in indifference curves that never intersect.
  • Nearly all indifference lines will be convex, or curving inwards at the center (towards the bottom left).

• Optimization of consumption

  • An agent should consume goods at the point where the most preferred available indifference curve is tangent to their budget constraint.
  • An indifference curve is a graph showing different bundles of goods between which a consumer is indifferent.
  • One can equivalently refer to each point on the indifference curve as rendering the same level of utility for the consumer.
  • That is, the indifference curve tangent to the budget constraint represents the maximum utility obtained utilizing the entire budget of the consumer.
  • Output is optimized where the budget constraint, marked in blue, is tangent to indifference curve, marked in red.

• Mapping Preferences with Indifference Curves

  • Economists mapping consumer preferences use indifference curves to illustrate a series of goods that represent equivalent utility.
  • These indifference curves, when mapped graphically alongside other curves, is called an indifference map.
  • A consumer will always prefer to be on the indifference curve farthest from the origin.
  • A consumer will be just as happy with any combination of Good X and Y on indifference curve I1, though s/he will prefer any bundle on indifference curve I2 or I3.
  • Describe the indifference curves for goods that are perfect substitutes and complements

• Introducing the Budget Constraint

  • The way economists demonstrate this arithmetically and visually is through generating budget curves and indifference curves.
  • Indifference curves: Indifference curves underline the way in which a given consumer interprets the value of each good relative to one another, demonstrating how much of 'good $x$' is equivalent in utility to a certain quantity of 'good $y$' (and vice versa).
  • Any point along the indifference curve will represent indifference to the consumer, or simply put equivalent preference for one combination of goods or the other.
  • Indifference curves are designed to represent an equal perception of overall value in a given basket of goods relative to a specific consumer.
  • Discuss the role of the budget set and indifference curve in determining the choice that gives a consumer maximum satisfaction

• Assumptions

  • An indifference curve is used to show potential demand patterns.

• Applications of Principles on Consumer Choices

  • The income effect and substitution effect combine to create a labor supply curve to represent the consumer trade-off of leisure and work.
  • In we are comparing 'Good X' and 'Good Y' to identify how a change in income will alter the overall amount of each good would likely be purchased along a series of indifference curves (see Boundless atom on 'Indifference Curves').
  • Graphically represented, the labor supply curve looks like a backwards-bending curve , where an increase in wages from W1 to W2 will result in more hours being worked and an increase from W2 to W3 will result in less.
  • Depending on which point on the backwards-bending curve we are on, the trade-offs and thus the consumer decision will change.

• Impact of Income on Consumer Choices

  • The simplest way to demonstrate the effects of income on overall consumer choice, from the viewpoint of Consumer Theory, is via an income-consumption curve for a normal good(see ).
  • The basic premise behind this curve is that the varying income levels (as illustrated by the green income line curving upwards) will determine different quantities and balanced baskets along the provided indifference curves for the two goods being compared in this graph.

• Deriving the Demand Curve

  • The law of demand pursues the derivation of a demand curve for a given product that benchmarks the relative prices and quantities desired.
  • One important consideration in demand curve derivation is the differentiation between demand curve shifts and movement along the curve itself.
  • Movement along the curve itself is the identification of what quantity will be purchased at different price points.
  • Giffen goods and neutral goods break this rule, with the former demonstrating an increase in demand as a result of a price rise (see ) and the latter demonstrating indifference to price in regards to the quantity demanded (illustrated as a completely vertical demand curve):
  • This graph illustrates the derivation of a demand curve for these goods.

• Curve Sketching

  • Curve sketching is used to produce a rough idea of overall shape of a curve given its equation without computing a detailed plot.
  • Determine the symmetry of the curve.
  • If the exponent of $x$ is always even in the equation of the curve, then the $y$-axis is an axis of symmetry for the curve.
  • Determine the asymptotes of the curve.
  • Also determine from which side the curve approaches the asymptotes and where the asymptotes intersect the curve.

• Budget Cuts

  • Citing the economic theories of Arthur Laffer, Reagan promoted the proposed tax cuts as potentially stimulating the economy enough to expand the tax base, offsetting the revenue loss due to reduced rates of taxation, a theory that entered political discussion as the Laffer curve.
  • Questions arose whether Reagan's policies benefited the wealthy more than those living in poverty, and many poor and minority citizens viewed Reagan as indifferent to their struggles.