Indifference curve of economics is discuss here

1. Indifference Curve
(IC)
Prepared by:
Smriti Chakrobarty
Lecturer
Fisheries and Marine Science
Noakhali Science and Technology University
Shared by:
Md. Asrafur Rahman
ASH1402072M
Fisheries and Marine Science
Noakhali Science and Technology University

2. •IC is a curve in which different combinations of
two commodities that are directed by different
points will receive same satisfaction or utility.
•IC shows the various combinations of commodity
X and Y that yield equal utility or satisfaction to
consumer.
•A higher IC shows a greater amount of
satisfaction and a lower IC, less satisfaction.
•So, IC show an ordinal measure of utility.

3. •A consumer’s tastes and equilibrium can be
shown by indifference curve (IC).
•Each point on this curve have same utility, so
consumer behavior will be neutral to choice
the combination.
•IC shows the various combinations of two
commodities which yield equal utility or
satisfaction to the consumer.

4. •All points on same IC yield the same
satisfaction.
•Points on IC – II indicate greater satisfaction
than points on IC – I, but less satisfaction than
points on IC – III.
•The absolute amount of satisfaction is not
specified.
•It is the ordering or ranking of a consumer’s
preferences to be able to draw these ICs.

5. IC 1 IC 2 IC 3
Qx Qy Qx Qy Qx Qy
1 10 3 10 5 12
2 5 4 7 6 9
3 3 5 5 7 7
4 2 6 4 8 6

6. Characteristics of IC
•IC exhibit some basic characteristics –
1. they are negatively sloped.
2. they are convex to the origin.
3. they cannot intersect.
•We are dealing with economic goods i. e. scarce
goods, so if consuming more of X; must
consume less of Y to remain at the same level of
satisfaction (on same IC). So, IC must be
negatively sloped.

7. •It convex to the origin because it exhibits
diminishing MRSxy.
•Two points (G and H) on IC – I and yield equal
satisfaction to consumer.
•Two points (G and J) on IC – II and also yield
equal satisfaction to consumer.
•H and J are points of equal satisfaction, so they
should lie on same IC; not on two different IC
as assumed.
•So, it is impossible for ICs to intersect.

8. 4. IC are very densely located.
- ICs are closely related. There will be a IC in
front of another IC.
5. Higher IC represent more satisfaction or
utility.
•Among different IC, the IC that are in upper
position and located in right side; every point
of it will show more utility than the lower IC.

9. Marginal rate of substitution (MRS)
•The MRS of X for Y (MRSxy) refers to the
amount of Y that a consumer is willing to give
up in order to gain one additional unit of X and
still remain in the same IC.
•As consumer moves down an IC, then MRSxy
diminishes.
•If Q (quantity) increases, so M. U. will be
decreases to a consumer and vice versa.
•To keep T. U. in fixed position, for each unit of
Y; consumer willing to get more unit of X.

10. •Thus, for a product (Y); the M. U. of other product
(X) will be decreases to a consumer.
•MRSxy = Y/X = 2/2 =1

11. The budget Constraint Line
•It shows all the different combinations of the
two commodities that a consumer can purchase,
given his or her income and prices of the two
commodities.
•Assume, Px = Py = 1 taka, income = 10 taka.
•If all income spent on X, could purchase 10 units
of X and vice versa.
•Joining the two points by a straight line found
the B. C. L. or B. L.

12. •In a given time, income of a consumer is fixed or
limited.
•And price of a product influenced by demand and
supply of the product.
•So, consumer has to face all these constraints.
•Suppose, consumer bought two product – X and Y.
•Quantity is x and y. Px and Py is Price of X and Y,
M is income of consumer.
•So, budget equation is – M = Px.x + Py.y

13. •If consumer buy only X, so x = M/Px.
•If buy only Y, then y = M/Py.
•Thus consumer can buy different combinations
of the two products when income is M and price
is Px and Py.
•Suppose, M = 100, Px = Py = 10 taka,
so B. E. is, 100 = 10x + 10y.
•Thus, possible combinations that can be bought
by consumer is -

14. x y
0 10
10 0
5 5
When 100 = 10x + 10y when M = Px.x + Py.y
x y
- -
0 M/Py
M/Px 0

15. Shifting of the budget line
1. Changes in income:
•When price is fixed and income doubles – then,
•B. L. will be changed as parallel (rightward) to
old B. L. and vice versa.
• M = PX.x + Py.y
• 200 = 10x + 10y
x y
0 20
20 0
10 10

16. 2. Changes in the price of goods:
•When income is fixed and price of a good is
increased or decreased – then,
•B. L. will be changed as parallel (rightward –
if price decreases and leftward if price
increases) to old B. L. and vice versa.

17. Price decrease of x Price decrease of y
M Px Py x y Px Py x y
100 10 10 0 10 10 10 0 10
100 10 10 10 0 10 10 10 0
100 10 10 0 10 10 10 10 0
100 5 10 ? 0 10 5 0 ?

18. 3. Changes in the price of both goods:
•(i). When price of x and y proportionally
increases (income is fixed), then B. L. will be
shifted as parallel to old line in left side.
•(ii) When price of x and y proportionally
decreases (income is fixed), then B. L. will be
shifted as parallel to old line in right side.
•(iii) when price of x decreases and price of y
increases (income is fixed), so consumer will
buy more of x and less of y and vice versa.

19. Equilibrium
•A consumer is in equilibrium when, given income
and price constraints, the consumer maximizes
the total utility or satisfaction from his or her
expenditure or when the person reaches the
highest possible IC, given his or her budget line.
•The consumer would like to reach IC - 3, but due
to limited income and price constraints it is not
possible.
•IC - 1 is possible, but do not found max T. U.

20. •IC - 2 is the highest IC that a consumer can
reach.
•To reach equilibrium, consumer should spend 5
taka on Y and 5 taka on X.
•Equilibrium occurs when B. L. is tangent to an
I. C.
•Thus, the slope of B. L. is equal to the slope of
I. C. - 2.

21. The Income Consumption Curve (ICC):
•When consumer’s income changes, (taste and price
constant) derive the ICC.
•ICC is the locus of points of consumer
equilibrium resulting when only the consumer’s
income is varied.
•If Px = Py = 1 and income rises to 6, 10 and 14
taka; then B. L. are drawn as 1, 2, 3.
•Thus, when M= 6, equilibrium reaches at IC – 1
by purchasing 3X and 3Y.

22. •When M = 10, equilibrium reaches at IC – 2 by
purchasing 5X and 5Y.
•When M = 14, equilibrium reaches at IC – 3 by
purchasing 7X and 7Y.
•By joining these points of consumer
equilibrium, found the income consumption
curve (ICC).

23. Engel Curve
•It shows the amount of a commodity that the
consumer would purchase per unit of time at
various levels of total income.
•It is the Engel curve for x.
•When M=6, purchase 3x.
•M=10, purchase 5x.
•M = 14, purchase 7x.
•The E. C. is positively sloped, > 0 and commodity
x is a normal good.
Qx M
3 6
5 10
7 14

24. •When negatively sloped, < 0 and good is
inferior.
•When the tangent to the Engel curve at a
particular point is positively sloped and cuts
the income axis, > 1 and commodity is a
luxury at that point.
•When the tangent to the Engel curve at a
particular point is positively sloped and cuts
the quantity axis, is between zero and 1 and
commodity is a necessity at that point.

25. The Price Consumption Curve (PCC):
•When price of Y and consumer tastes and
income are constant, then by changing price of
X; we can found PCC.
•The PCC for X is the locus of points of
consumer equilibrium resulting when only the
price of X is varied.
•When Px = Py = 1 and M =10, equilibrium
comes at a point on IC – 2.

26. •If Px falls to 0.50 while Py and M remain
unchanged, the B. L. rotates counter
clockwise.
•With this new B. L., equilibrium comes at a
new point where old B. L. is tangent to IC – 3.
•By joining these point of equilibrium, get Price
Consumption Curve (PCC).

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