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: Slope Indifference 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-in Bowed-in Indifference Indifference Curve Curve

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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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Indifference Indifference Curves Cannot Curves 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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Indifference Indifference 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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The The Budget LineBudget Line

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Consumer EquilibriumConsumer EquilibriumThe 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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Consumer Consumer 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.

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Indiffrence analist