Livestock Economics, Marketing and Business Management

INDIFFERENCE CURVE TECHNIQUE

• This technique has been developed by the modern economists J.R.Hicks and R.G.D.Allen for the analysis of demand.

Assumptions

• Rationality - The consumer is assumed to be rational.
• Ordinal utility - Here the measure of utility is viewed as the level of satisfaction rather than the amount of satisfaction.
• The levels of satisfaction are comparable rather than quantifiable i.e. consumer ranks his satisfaction derived from different goods and he does not know precisely the amount of satisfaction.
• Consistency and Transitivity of choice – it is assumed that the consumer is consistent in his choice i.e. if he chooses commodity A over B in one period, he would not choose B over A in another period. If A >B, then B<A.
  • Similarly it is assumed that consumer’s choices are characterised by transitivity.
  • If A is preferred to B and B is preferred to C, then A is preferred to C. Symbolically if A>B and B>C, then A>C

Indifference schedule

• An indifference schedule may be defined as a schedule of various combinations of two goods that would give the same level of satisfaction to the consumer.

Indifference schedule –I

Combinations	Kgs. of meat	No. of eggs
I	1	20
II	2	15
III	3	11
IV	4	8
V	5	6
VI	6	5

• Assume a person has the choice of spending a part of his resources on two commodities, meat and eggs.
• The above table shows various combinations of meat and eggs, which give the consumer the same level of satisfaction.
• Since all combination of meat and eggs give the consumer the same level of satisfaction, the consumer is indifferent whether he gets the first or last of the two commodities.

Indifference curve (Click here to view the graph)

• The figures in the above table, if plotted on a graph give the Indifference curve.
• While the Indifference schedule is the tabular statement of different combinations of two commodities yielding the same level of satisfaction, Indifference curve depicts the same on a graph.
• An Indifference curve may therefore defined as the locus of various combinations of two commodities which yield the same total satisfaction to the consumer. This curve is also known as Iso-utility curve (Iso means same).

Indifference map

• Consider another Indifference schedule which is as follows.

Indifference schedule –II

Combinations	Kgs. of meat	No. of eggs
I	1	22
II	2	17
III	3	13
IV	4	10
V	5	8
VI	6	7

• Consumption of any combination of commodities in the second schedule would mean that the consumer is on a higher level of satisfaction than with the previous schedule because the quantity of egg is higher in all the corresponding combinations in the second schedule.
• Obviously any combination in the schedule II is superior to any combination in schedule I.
• Plotting the second schedule, we get an indifference curve above the first curve implying higher level of satisfaction.
• In the same way, we can draw many similar curves representing greater or lesser satisfaction.
• Two or more indifference curves drawn on a same graph are collectively called as indifference map.
• In other words indifference map represents a collection of indifference curves where each curve shows a certain level of satisfaction to the consumer.
• While the higher indifference curve implies higher level of satisfaction, lower indifference curve yield lower utility.

  

Properties of indifference curves

• An indifference curve has a negative slope, which denotes that if the quantity of one commodity decreases the quantity of the other must increase if the consumer is to stay on the same level of satisfaction.
• Indifference curves do not intersect each other.
• Indifference curves are convex to the origin. This is because as the consumer adds more of the commodity, he gives up only less and less of the other.
• Any movement of the indifference curves to the right is a movement to greater total utility.