Indifference curve approach

1. INDIFFERENCE CURVE
APPROACH/ORDINAL
APPROACH
Dr. Geethu Anna Mathew, Asst Professor, Dept of Management

2. INDIFFERENCE CURVE APPROACH
• The credit of rendering this analysis as an important tool goes to Hicks
and Allen in 1934.
• An indifference curve is a geometrical presentation of a consumer’s
scale of preferences. It represents all those combinations of two
goods which will provide equal satisfaction to a consumer.

3. Scale of Preference
A scale of preference is a list of human wants arranged in order of
priority. It is a priority rating of all individual wants according to their
importance.
1.Ranking of needs
1.Identification of highest priority
1.Example: What will you do, if you have Rs1000…

4. Combination of Two Goods

12. Properties of Indifference Curve
• Indifference curve slopes downward from left to right:
• The downward slope of an indifference curve indicates that a consumer will have to
curtail the consumption of one commodity if he wants to consume large quantity of
another commodity to maintain the same level of satisfaction
• Indifference curve is convex to the point of origin:
• This property is based on the law of diminishing marginal rate of substitution. The
inverse relationship between commodity x and commodity y in a combination is a
reason for the convex shape.
• Two Indifference Curves never cut each other
• Each indifference curve represents different levels of satisfaction, so their intersection
is ruled out.
• Higher Indifference Curves represent more satisfaction
• Indifference Curve touches neither x-axis nor y-axis
• Indifference curves need not be parallel to each other:

14. • Assume that a consumer has a total budget of ₹40, with which he can
buy various combinations of Good X and Good Y. The cost of one unit
of Good X is ₹8 and the cost of one unit of Good Y is ₹4 respectively.
Now, the potential set of combinations that can be purchased by the
consumer are:

18. Example for Consumer surplus
• The consumer surplus formula = Highest product price consumers
can pay – Market price
• Let's say that you bought an airline ticket for a flight to Kashmir
during school vacation week for Rs 10,000, but you were expecting
and willing to pay $15,000 for one ticket. The $5,000 represents your
consumer surplus.