Indiffrence analist

Indifference AnalysisIndifference Analysis

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Indifference CurvesIndifference Curves
 Indifference analysis is an alternative way
of explaining consumer choice that does
not require an explicit discussion of utility.
 Indifferent: the consumer has no
preference among the choices.
 Indifference curve: a curve showing all the
combinations of two goods (or classes of
goods) that the consumer is indifferent
among.

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Indifference Curves: ShapeIndifference Curves: Shape
A common shape for an indifference
curve is downward sloping.
– For the consumer to be indifferent to
the bundle of goods chosen, as less of
one good is consumed, more of another
must be consumed.

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Indifference CurveIndifference Curve

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Indifference Curves: Shape (2)Indifference Curves: Shape (2)
 The indifference curves are not likely to be
vertical, horizontal, or upward sloping.
– A vertical or horizontal indifference curve holds the
quantity of one of the goods constant, implying that the
consumer is indifferent to getting more of one good
without giving up any of the other good.
– An upward-sloping curve would mean that the
consumer is indifferent between a combination of
goods that provides less of everything and another that
provides more of everything.
– Rational consumers usually prefer more to less.

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Indifference Curve ShapesIndifference Curve Shapes

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Indifference Curves: SlopeIndifference Curves: Slope
 The slope or steepness of indifference
curves is determined by consumer
preferences.
– It reflects the amount of one good that a consumer
must give up to get an additional unit of the other good
while remaining equally satisfied.
– This relationship changes according to diminishing
marginal utility—the more a consumer has of a good,
the less the consumer values an additional value of
that good. This is shown by an indifference curve that
bows in toward the origin.

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Bowed-inBowed-in
IndifferenceIndifference
CurveCurve

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Indifference Curves:Indifference Curves:
No Crossing Allowed!No Crossing Allowed!
 Indifference curves cannot cross.
 If the curves crossed, it would mean that
the same bundle of goods would offer two
different levels of satisfaction at the same
time.
 If we allow that the consumer is indifferent
to all points on both curves, then the
consumer must not prefer more to less.

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Curves CannotCurves Cannot
Cross!Cross!

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Indifference MapIndifference Map
 An indifference map is a complete set of
indifference curves.
 It indicates the consumer’s preferences
among all combinations of goods and
services.
 The farther from the origin the indifference
curve is, the more the combinations of
goods along that curve are preferred.

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MapMap

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Budget ConstraintBudget Constraint
 The indifference map only reveals the
ordering of consumer preferences among
bundles of goods. It tells us what the
consumer is willing to buy.
 It does not tell us what the consumer is
able to buy. It does not tell us anything
about the consumer’s buying power.
 The budget line shows all the
combinations of goods that can be
purchased with a given level of income.

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TheThe
Budget LineBudget Line

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Consumer EquilibriumConsumer Equilibrium
The indifference map in
combination with the budget line
allows us to determine the one
combination of goods and
services that the consumer most
wants and is able to purchase.
This is the consumer equilibrium.

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ConsumerConsumer
EquilibriumEquilibrium
The consumer maxi-
mizes satisfaction by
purchasing the
combination of
goods that is on the
indifference curve
farthest from the
origin but attainable
given the
consumer’s budget.

Indiffrence analist

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