The indifference curve analysis is a great way to understand consumer trends in microeconomics. British economist Francis Ysidro Edgeworth first introduced indifference curve analysis in the early twentieth century, and Italian economist Vilfredo Pareto popularised it. Economists J.R. Hicks and R.G.D Allen, on the other hand, further expounded the concept and enlarged its extension. This article will discuss indifference curve analysis and its importance in economics in detail.
What Is The Indifference Curve In Economics?
People’s levels of contentment are difficult to quantify numerically. But, people can and do determine which options would provide them with greater, less or the same level of happiness. An indifference curve is a graph depicting the amalgamation of two commodities that provide equal utility or satisfaction to the consumer. A customer is indifferent to the two options at each point on an indifference curve, and all positions provide him with the same value. Indifference curves are interpretive devices utilised in modern microeconomics to show consumer choices and budget constraints. In the study of welfare economics, economists have accepted the ideas of indifference curves.
The traditional indifference curve is drawn downward, moving from left to right and converging to the source. A consumer who is provided with a choice between any two locations would not choose one over another. The consumer would be unconcerned with the mix of products received because all of the combinations indicated by the points are equally attractive. Other variables being similar, an indifference curve is always predicated on the premise that certain elements stay constant. In a nutshell, an indifference curve has the following features:
- An indifference curve depicts a mixture of two items that provide the same level of satisfaction and usefulness to the consumer, resulting in indifference.
- The customers have the same choice for the pairs of items depicted along the curve—that is, they are unconcerned with any number of goods on the curve.
How to Create an Indifference Curve?
The indifference curve is represented on a typical X and Y-axis graph. Each point, dimension or axis symbolizes a different sort of good on the graph. The indifference curve, seen on the graph, illustrates why the customer is indifferent to the two items since they provide the same value. This graph depicts how a consumer is unconcerned about two things that provide the same amount of comfort. It is crucial to understand that two curves that are not the same cannot intersect with each other. Indifference curves never cross and never overlap. However, it is not easy to understand therefore getting help from PhD dissertation writing services becomes necessary.
Why Is An Indifference Curve Analysis Important?
To characterise people’s choices, economists utilise a paradigm for maximizing utility. The degree of utility that a consumer gets is defined in numerical terms in Consumer Choices. In contrast, indifference curve analysis is a method of articulating human preferences that do not need numbers to determine utility. Many economists criticise the numerical assessment of utility, and for them, indifferent curve analysis is a better approach. The indifference curve approach helps in illustrating the consumer choices and utility subjectively. Here are some of the advantages of the indifferent curve analysis:
Subjective Analysis of Utility
For numbers, savvy economists’ numbers perfectly measure the utility of any commodity for a consumer. In quantitative analysis, any combination of goods is quantified and measured as per its mathematically proportioned utility. In contrast, an item’s value to an individual is subjective and psychological and hence cannot be quantified. Therefore, it is a good approach to evaluate utility among various people.
Multifarious Approach to Utility Analysis
The consumer choice theory is a solitary analysis in which one commodity’s utility is considered irrespective of the utility of the other. This assumption is incorrect since buyers purchase a bundle of things rather than a single item. The indifference curve approach is a two-commodity paradigm that examines buyer behaviour when substituting, complementing and unrelated items are present. As a result, it outperforms the consumer choice theory.
Resolves the Problem of Exchange
The problem of trading between two persons can be explained using the indifference curve analysis. Take two customers, A and B, who own two items X and Y in set quantities. The issue is how they will be able to swap their products. Assume that A wants more of X and B wants more of Y. Both will benefit if they swap undesirable quantities of the good, i.e. if either can shift to a higher indifference curve. But at what level will the swap occur? At a point where the marginal utility between the two items match their price ratios, both will trade their goods.
Assessment of Cost of Living
When calculating the living costs or quality of living in regards to economic indicators, the indifference curve analysis is utilised. By comparing two time periods where the consumer’s income and the prices of two items vary, economists can determine whether the consumer is benefiting or not.
What Are The Properties Of Indifference Curve Analysis?
Indifference curve analysis has the following four properties:
- The arcs of the indifference curve never intersect. If there is an intersection, there would be a lot of uncertainty about what the genuine utility is.
- The distance of an indifference curve away from the origin suggests a commodity’s higher usefulness. The more the curve is from the source, the more utility the consumer will derive from a product.
- Indifference curves are slanted downward. The only way for a person to increase his consumption of one item without generating value is to consume another commodity and create the same benefit. As a result, the slope slides downward.
- The form of indifference curves is convex. The curve moves horizontally on the graph as it shifts to the right side. It shows that everyone experiences declining marginal utility, which means that consuming more of one thing will result in less utility than consuming more of the other.
The main goal of indifference curve analysis is to find potential combinations of products and services that provide customers with the same utility (efficacy or enjoyment). When presented with a budget limitation, it is expected that individuals would pick the basket that increases their overall utility. It assumes that consumers will allocate their money intelligently. Indifference analysis does not need the quantification of utility for a single commodity. Instead, it relies on a bundle of goods and services that provide the same utility. As a result, indifference analysis solves the long-standing dilemma of determining how to assess utility.