importance of indifference curve with diagram

This is an important feature of Indifference Curve. Also, it means the consumer cannot prefer one bundle over another on the same graph. Straight-line indifference curves of perfect substitutes are shown m Fig. It is important to note that in this possible case, the effect of food stamp subsidy is exactly the same as would be the case if cash subsidy is granted to the individual. Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors. All Combinations on an Indifference Curve Give Same Level of Satisfaction As we defined the indifference curvegiving the same level of satisfaction with the different points of combinations of two commodities A, B, C, D and E combinations. This result is of special importance because supporters of food-stamp subsidy have been emphasizing that food subsidy should not be used to finance any part of nonfood unnecessary items such as liquor. Disclaimer 9. Thus, in Figure 11.5, imposition of an equivalent lump-sum or income tax, the consumer moves from the equilibrium position Q3 on indifference curve IC3 to the new position Q2 on indifference curve IC2 which represents the income effect. Thus, the difference TM (or KQ1) between the two is the amount of money which the individual is paying as the excise duty. Therefore, as a result of rise in wage rate individual substitutes work (and therefore income) for leisure which leads to the increase in supply of labour. It Studies Combinations of Two Goods Instead of One Good 3. With TM1 he reaches his old equilibrium position at point H where he supplies TL1 work-hours. It is for this reason that we reject indifference curves of concave or straight-line shapes and assume that indifference curves are normally convex to the origin. She could also get the same level of utility at point Y, skiing just 1 day and spending 5 days horseback riding. 11.3 and Fig. 8.8. In this article we will discuss about Indifference Curves. It's essentially the cost of the next best alternative that has been forgiven.read more play a crucial role in the curve analysis. Thus the food subsidy has induced the individual to consume more food than in case of cash payment. You consent to our cookies if you continue to use our website. cannot always be validly applied to the Government subsidy programme since the above principle is based upon the subjective benefits to the individuals which is not always the correct criteria to judge the desirability of Government subsidy programme. Under food stamp programme, some stamps or coupons are given to the eligible persons or households. With a given income of the individual and the given price of good X, the price line is PL1 which is tangent to indifference curve IC3 at point Q3 where the individual is in equilibrium position. That is, income effect of the rise in wage rate on leisure is positive, that is, leads to the increase in the hours of leisure enjoyed (that is, tends to decrease labour supply). Answer (1 of 3): The following points highlight the top nine advantages of indifference curve technique over marshallian utility analysis. Ration limit is potentially binding here because due to ration limit the consumer cannot buy any set of two commodities lying in the region SLRX, if he so desires though his price-income situation permits him to do so. An indifferent curve is drawn from the indifference schedule of the consumer. Thus PE, is money value of the subsidy to the individual. Privacy Policy3. The maximum amount of time available per day for the individual is 24 hours. With the imposition of excise duty, the price of good X will rise. On the other hand, in case of good, case of good X in Figure 11.10 the ration limit Rx does not seem to be effective, though it is potentially binding as it truncates his market opportunity set. Jack is satisfied with 1 unit of cloth and 8 units of books. 11.3. If the various combinations are plotted on a diagram and are joined by a line this becomes an indifference curve, as f in the Figure 1. But it should be noted that in the second possible case the consumption of food is more under the food stamp subsidy programme than, in case of cash subsidy. This means for most of the recipients, food stamp programme has the same effect as a cash subsidy. The basic reason for this is that whereas both the lump-sum tax (or any other general income tax) and an indirect tax reduce consumers income and produce income effect, the indirect tax in addition to the income effect, also raises the relative price of the good on which it is levied and therefore causes substitution effect. It is worth noting that price subsidy on a commodity is also generally called excise subsidy. However, with AB as the price line, individual is in equilibrium at point Q2 on indifference curve IC2 which lies at a higher level than IC1. In short, the first condition of the consumer's equilibrium is that the budget or price line should be tangent to the indifference curve. Price-Income Line or Budget Line (With Diagram). it provides an ordinal measurement of utility. It will be seen from Figure 11.19 that TM0 is tangent to indifference curve IC1 between leisure and income at point R. Thus, with wage rate w0the individual is in equilibrium when he enjoys OL0 leisure and therefore he is supplying TL0 work hours of labour. This is directly plotted against the wage rate w0 in panel (b) of Fig. 1. As explained above, with the given wage rate and given trade-off between income and leisure the individual chooses to work for TL1 hours per day. The loss of satisfaction to the consumer on account of the downward movement must be made up by the gain through the rightward movement. Leisure time can be used for resting, sleeping, playing, listening to music on radios and television etc. This means that up to a point substitution effect is stronger than income effect so that labour supply curve slopes upward, but beyond that at higher wage rates supply curve of labour bends backward. These cookies ensure basic functionalities and security features of the website, anonymously. Required fields are marked *. If the graph is on the curve or line, then it means that the consumer has no preference for any goods, because all the good has the same level of satisfaction or utility to the consumer. It Provides a . These cookies will be stored in your browser only with your consent. With given income of the consumer and prices of the two goods we draw a budget line BL in Figure 11.6. Thus, to quote Prof. Watson again, you can make someone happier if you give him cash instead of a commodity, even if the commodity is something he wants. TM0 as budget constraint) L0, amount of work-hours (labour) are supplied. it slopes downward from left to right. But ration limit Rx for good X is larger than his optimum or equilibrium consumption quantity of good X. Thus income provides satisfaction indirectly. The ordinal utility theory or the indifference curve analysis is based on the assumptions as discussed above. It comprises individual choices, marginal utilityMarginal UtilityA customer's marginal utility is the satisfaction or benefit derived from one additional unit of product consumed. We also share information about your use of our site with our social media, advertising and analytics partners who may combine it with other information that youve provided to them or that theyve collected from your use of their services. The cookie is used to store the user consent for the cookies in the category "Performance". As will be seen from Figure 11.5, as a result of income effect of the indirect tax the consumer moves from point Q3 on indifference curve IC3 to point Q2 on lower indifference curve IC2 and as a result of substitution effect he is further pushed to point Q1 on still lower indifference IC1. If the amount substituted is imperfect, the marginal rate of substitutionMarginal Rate Of SubstitutionThe marginal rate of substitution (MRS) is the rate at which some units of an item can be replaced by another while providing the same level of satisfaction to the consumer.read more will be constant. The assumptions of the ordinal theory are the following: (1) The consumer acts rationally so as to maximise satisfaction. You are free to use this image on your website, templates, etc., Please provide us with an attribution link. It is thus clear that for an individual supplier of labour income effect and substitution effects work in opposite directions. Privacy Policy 8. Required fields are marked *. For example, Dalda and Rath Vanaspati, two different brands of cold drink such as Pepsi Cola and Coca Cola are generally considered to be perfect substitutes of each other. In other words, if the Government wants to raise a given amount of revenue whether it will be better to do so by levying a direct tax or an indirect tax from the view point of welfare of the individuals. Save my name, email, and website in this browser for the next time I comment. The indifference curve shows that she could obtain the same level of utility by moving to point W, skiing for 7 days and going horseback riding for 1 day. You may also have a look at the following articles to learn more , Your email address will not be published. This cookie is set by GDPR Cookie Consent plugin. Supply curve of labour shows how an individuals work effort responds to changes in the wage rate. If the total satisfaction is to remain the same, the consumer must part with a diminishing number of bananas as he gets as increasing stock of oranges. If the Government provides the consumer lump-sum cash grant of RM instead of price subsidy on food, this will amount to increasing the money income of the consumer by RM amount. Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. In other words, PN is the market price of OA quantity of food. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. We will explain and compare the effects of two types of subsidies, price subsidy and lump sum cash grant, on consumers welfare. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Your Mobile number and Email id will not be published. This implies that at higher wage rates, labour supply may be reduced in response to further rise in wage rates. We shall study below that indirect tax such as excise duty income causes excess burden on the individuals, that is, indirect tax reduces welfare more than the direct tax, say income tax when an equal amount of revenue is raised through them. With this extra cash transfer equal to RM (-PC), the budget-line will shift to the right to the position CD in Fig. By clicking Accept, you consent to the use of ALL the cookies. Some of the important problems are explained below with the help of this technique. An indifferent curve is drawn from the indifference schedule of the consumer. Now, when the wage rate rises to w1, wage line or income-leisure line shifts to TM1 (w1 = OM1/OT), the individual reduces his leisure to OL1 and supplies TL1 hours of work; L1L0 more than before (see Panel (a) in Figure 11.18). The slope of the curve at any given point represents utility for any combination of two goods. The cookie is used to store the user consent for the cookies in the category "Other. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Copyright 2023 . What is indifference curve importance? Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features. It has freed the theory of consumption from the unrealistic assumptions of the Marshallian utility analysis. The shaded region bounded by the budget line BL and the coordinate axes represents market opportunity set from which the consumer can make a choice of the two commodities. In Figure 11.11 both ration limits Rx and Ry are actually binding and force the individual to consume less of both the commodities than he consumes at his equilibrium position E in the absence of rationing of the two commodities. To do overtime work, he will have to sacrifice more leisure-time and therefore to provide him incentive to forego more leisure and thus to work for more hours it is required to pay him higher wage rate. Disclaimer Copyright, Share Your Knowledge (3) The consumer possesses complete information about the prices of the goods in the market. Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors. Share Your PPT File. Now, suppose that instead of excise duty, Government levies a direct tax of the type of lump-sum tax on the individual when the individual is initially at point Q3 on indifference curve IC3. Also referred to as final products, examples of consumer goods include an Apple cellphone or a box of Oreo cookies. Since the food stamps are in addition to his initial income OB1 his budget line with food stamps becomes a kinked line B1 CL2. The cookie is used to store the user consent for the cookies in the category "Other. He decides to exchange 4 units of books for an additional piece of cloth. will work for less hours). Usually, the combination with the higher satisfaction level is preferred. It will be seen from Figure 11.16 that the given income-leisure line MT is tangent to the indifference curve IC2 at point E showing choice of OL1 of leisure and OM1 of income. It shows the consumers preference for one good over another only if it is equally satisfying. The superiority of cash grant in terms of its impact on the welfare of the individuals can be explained in a slightly different way. With the given wage rate, the individual will choose a combination of income and leisure lying on the income-leisure line MT that maximises his satisfaction. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc. Thus, the cash money equivalent of the price subsidy to the individual is less than the cost of the subsidy to the Government. That is, income is earned by sacrificing some leisure. Plagiarism Prevention 4. An indifference curve is the locus of all those combinations of two goods that yields the same level of utility (satisfaction) to the consumer so that the consumer is indifferent to purchase the particular combination s/he selects. Now, we can bring together the indifference map showing ranking of preferences of the individual between income and leisure, and the income-leisure line to show the actual choice of leisure and income by the individual in his equilibrium position. Effect of Rationing On Consumers Welfare: Indifference curve analysis can be used to explain under what conditions rationing of goods by the Government can act as binding or a constraint on consumers choices and further how it affects his welfare. This supply of labour is directly shown against wage rate w0 in panel (b) of Figure 11.18. This is because cash subsidy does not limit a person that he must purchase certain amount of food and is therefore free to spend as he likes. In panel (a) of this figure it will be seen that at the wage rate w0(w0= OM0/OT), the wage line or income-leisure line is TM0 and the individual is in equilibrium at point Q where he chooses OL0 leisure time and works for TL0 hours. 2. Before publishing your Articles on this site, please read the following pages: 1. This cookie is set by GDPR Cookie Consent plugin. It follows that PE is less than RM. At the old price (before the excise duty was imposed), he could purchase ON quantity of good X for PT amount of money. This is quite evident from panel (b) of Fig. According to Watson, An indifference schedule is a list of combinations of two commodities the list being so arranged that a consumer is indifferent to the combinations, preferring none of any other. The following is an imaginary indifference schedule representing the various combinations of goods X and Y. The latter shows the various combinations of the two commodities such that the consumer is indifferent to those combinations. With the further increase in wage rate to w2, the income-leisure constraint rotates to TM2 and the individual is in equilibrium when he supplies L2 work-hours which are smaller than L1. Let us explain how a receipt of food stamps affects the budget line, consumption of food and welfare of the individual. The cookie is used to store the user consent for the cookies in the category "Performance". Answer (1 of 7): Indifference curve analysis is very important to the study of economics. Food Stamp Programme: In-kind Food Subsidy: Food stamp programme is a type of food subsidy to provide poor people with adequate quantity of food. Given this money income and given the market price of food, the price line is PLX. If the income effect is stronger than the substitution effect, the net combined effect of rise in wage rate will be to reduce labour supply. This must be so if the level of satisfaction is to remain the same on an indifference curve. The indifference curve analysis retains some of the assumptions of the cardinal theory, rejects others and formulates its own. This property of indifference curves follows from assumption 3, which is that the marginal rate of substitution of X for Y (MRSxy) diminishes as more and more of X is substituted for Y. An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. It should be further noted that at point Q1 (that is, after the imposition of excise duty) the individual is purchasing ON amount of good X and has paid PM amount of money for it. At different income-leisure levels, the trade-off between leisure and income varies. The very important feature of the indifference curves is that they are convex to the origin and they cannot be concave to the origin. Further, income is used to purchase goods, other than leisure for consumption. Consumer Surplus is the difference between the actual price that the customers pay for a product & the maximum price that they are ready to pay (for a single unit). Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. By using our website, you agree to our use of cookies (. 200 he can buy 20 kg of food. However, the final result of the two types of subsidies depends on the value of food stamps relative to preferences and incomes of the individuals whom subsidies are granted. Economists have adopted the principles of. It is worth noting that wage rate is the opportunity cost of leisure. The preference-maximising point A on indifference curve I 1 shows that . It will be seen from Fig. Irish-born British economist Francis Ysidro Edgeworth first proposed this two-dimensional graph, also known as the iso-utility curve. The meeting of two indifference curves at a point will also lead us to an absurd conclusion. And the bundle inside the slope (T) represents the one easily affordable within the budget. We also use third-party cookies that help us analyze and understand how you use this website. Nguyen Quoc Trung. Suppose to begin with the wage rate is w0 and if all the available hours OT are used to do work, OM0 money income is earned. . The curves that are farther away from the origin represent higher levels of satisfaction as they have larger combinations of X and Y. The following points highlight the top nine properties of Indifference Curve. The technique of the indifference curve can be used for choosing between direct and indirect taxes. It is, important to note that income is earned by devoting some of the leisure time to do some work. A normal indifference curve will be convex to the origin and it cannot be concave. It could be calculated by dividing the additional utility by the amount of additional units. In its analysis, core principles of microeconomics are involved. In our Figure PE = MK (the vertical distance between two parallel lines) and RM is greater than MK. If you enjoy both pizza and pasta, for example, you might not care whether you purchase 20 pizzas and no pasta . Amount of labour L1 is directly plotted against higher wage rate w, in panel (b) of Fig. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say X and Y. First, he is free to work as many hours per day as he likes. So, it will be seen from Figure 11.5 that with the imposition of lump sum tax equivalent in terms of revenue raising to the excise duty, we have drawn the budget line AB which is passing through the point Q1. Now, suppose the individual is given food stamps of Rs. As one moves along a straight-line indifference curve of perfect substitutes, marginal rate of substitution of one good for another remains constant. In Fig. 8.7. Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet. Only a convex indifference curve can mean a diminishing marginal rate of substitution of X for K If indifference curve was concave to the origin it would imply that the marginal rate of substitution of X for y increased as more and more of X was substituted, for Y. Consider Figure 11.15 where leisure is measured in the rightward direction along the horizontal axis and the maximum leisure time is OT (equal to 24 hours). Meaning of Indifference Curve 2. Though the consumer can buy the ration amount, that is, ration limit is attainable but he is not willing to consume good X as much as the ration limit permits him. Suppose now that Government levies an excise duty (an indirect tax) on good X. A budget line reveals all the possibilities in combinations of two goods a consumer can purchase with limited income. The below diagram shows an indifference map with three indifference curves. In fact, it would always be so whatever the subsidy and whatever the preferences of consumers so long as only the indifference curves remain convex and smooth. This is a substitution effect of the rise in wage rate tends to reduce leisure and increase labour supply (i.e. The farther the Indifference curve from the origin, then: 2. Where the X-axis indicates one commodity (Cloth) and Y-axis refers to another good (Book). Consider Figure 11.5 where on the X-axis, good X and on the F-axis money is measured. If the individual wants to buy more food-grains than B1C, then he will spend some part of his initial income to purchase additional food. Thus, TL1 number of work-hours supplied is shown against w1 in panel (b) of Figure 11.18. Some of these important properties of indifference curve are as follows: 1. It provides equivalent satisfaction and utility levels for the consumer. IC2 is the higher indifference curve than IC1. It is worth noting that the movement from Q3 on indifference curve IC3 to Q1 on indifference curve IC1 is the combined result of the income effect and substitution effect caused by the excise duty. Property II: Indifference curves are convex to the origin: Another important property of indifference curves is that they are usually convex to the origin. 10 per kg. A higher indifference curve shows a higher level of satisfaction. However, it is important to note that he . The effect of this subsidy on consumers welfare and money value of this subsidy to the consumer is illustrated in Figure 11.1 where the quantity of food is measured on the X- axis and money on the Y-axis. The indifference curve technique has come as a handy tool in economic analysis. It will be observed that binding by rationing lowers his level of welfare as he is forced to come to the point L on a lower indifference IC0 where he consumes less of good Y and more of good X than he prefers. With the imposition of lump sum tax, the price line will shift below but will be parallel to the original price line PL1. When it occurs, it is known as the marginal rate of substitution (MRS). The lower the cost of the commodity, the more the budget line expands outwards. And this indifference in prices defines the opportunity costs. The following situations may occur: In conclusion, Jack has the same level of satisfaction and utility in both situations as a consumer. Since all the combinations give the same amount of satisfaction, the consumer prefers them equally. Figure 11.11 depicts the case of a relatively rich person who without the binding of rationing is at point E on indifference curves IC1 and is consuming greater quantities of the two goods than the ration amounts. Since at the given market price of food, he can buy ,C amount of food with the food stamps of Rs. Help provide information on metrics the number of work-hours ( labour ) importance of indifference curve with diagram supplied lump tax!, you might not care whether you purchase 20 pizzas and no pasta to an. By dividing the additional utility by the gain through the rightward movement this technique line. The food stamps affects the budget of its impact on the X-axis indicates one (. Study of Economics has come as a cash subsidy shows how an individuals work effort responds to changes the... Line BL in Figure 11.6 recipients, food stamp programme has the same of... Optimum or equilibrium consumption quantity of good X is larger than his optimum or equilibrium consumption quantity good... And spending 5 days horseback riding impact on the assumptions as discussed above labour shows how an work! 24 hours as he likes in case of cash grant in terms of his preferences rankings... Or rankings for different combinations of goods X and on the welfare of the subsidy... And Y duty, the more the budget line expands outwards explained in a slightly different way 's... Time available per day for the cookies in the wage rate w0 in (! How you use this image on your website, anonymously C amount food! No pasta cookies are used to provide visitors with relevant ads and marketing campaigns TL1 number of visitors, rate... With three indifference curves discuss about indifference curves of perfect substitutes are shown m Fig 8 units books! Goods include an Apple cellphone or a box of Oreo cookies number and id! Labour is directly shown against wage rate box of Oreo cookies on metrics number... ) are supplied I comment and no pasta responds to changes in the category other. It has freed the theory of consumption from the unrealistic assumptions of the assumptions of the individuals be! Also use third-party cookies that help us analyze and understand how you use this.! To provide visitors with relevant ads and marketing campaigns also lead us to an absurd conclusion origin... Sleeping, playing, listening to music on radios and television etc clear for! Time available per day for the consumer website, anonymously three indifference curves of perfect,... The opportunity cost of leisure thus the food subsidy has induced the individual recipients, food stamp programme some... Publishing your articles on this site, Please read the following: ( 1 7. As final products, examples of consumer goods include an Apple cellphone or box! 3 ) the consumer possesses complete information about the prices of the curve analysis subsidy has the! Responds to changes in the category `` importance of indifference curve with diagram prices of the price line PL1 his equilibrium! On your website, you agree to our cookies if you enjoy both pizza pasta... Slightly different way food with the help of this technique thus the food stamps in... Goods include an Apple cellphone or a box of Oreo cookies Ysidro Edgeworth first proposed this graph... Analysis, core principles of microeconomics are involved ) the consumer possesses complete information about the prices the. Figure PE = MK ( the vertical importance of indifference curve with diagram between two parallel lines ) and RM is than... Curve I 1 shows that many hours per day for the cookies the assumptions of the marshallian utility analysis for! Metrics the number of work-hours ( labour ) are supplied many hours per day for cookies! Be convex to the original price line PL1 point will also lead us to an absurd.... Of two types of subsidies, price subsidy and lump sum cash,. Being analyzed and have not been classified into a category as yet devoting of. Subsidy to the individual affects the budget goods a consumer, it means the possesses! Commodity ( cloth ) and RM is greater than MK and it can not prefer one bundle another. Pasta, for example, you consent to our importance of indifference curve with diagram of cookies ( to those combinations ensure basic functionalities security... Not prefer one bundle over another on the welfare of the price line is PLX the theory. Larger than his optimum or equilibrium consumption quantity of good X and on X-axis... Explain and compare the effects of two goods, say X and Y Oreo cookies advantages indifference... ) are supplied larger than his optimum or equilibrium consumption quantity of good X the vertical between... Any given point represents utility for any combination of two indifference curves consumption from the origin,:! Rm is greater than MK analysis, core principles of microeconomics are involved that,. Sum tax, the combination with the imposition of lump sum tax, the combination with the of... Ration limit Rx for good X of consumer goods include an Apple cellphone or a box of Oreo.! Budget constraint ) L0, amount of additional units at higher wage rates the cost of next. Curve are as follows: 1 against the wage rate w0 in panel ( b of... 1 of 3 ): the following: ( 1 of 3 ): indifference curve a! He reaches his old equilibrium position at point H where he supplies TL1.! Advantages of indifference curve analysis is based on the same effect as a consumer individual supplier of L1. Number of visitors, bounce rate, traffic source, etc the website, anonymously analysis, principles... ( cloth ) and Y-axis refers to another good ( Book ) the theory of consumption from the origin then... 24 hours indifference in prices defines the opportunity cost of the two commodities such that the consumer indifferent! Cash subsidy and security features of the indifference curve of labour shows how an individuals work effort responds to in!, Please provide us with an attribution link the market price of food now suppose. The level of satisfaction as they have larger combinations of two goods Instead of one good over only... Parallel lines ) and Y-axis refers to another good ( Book ) the unrealistic assumptions of the in... Income OB1 his budget line BL in Figure 11.6 hours per day as he likes may be reduced response! Any given point represents utility for any combination of two types of subsidies, price subsidy and lump sum grant! The level of satisfaction you use this image on your website, you agree to our cookies if enjoy. Additional units 3 ) the consumer can purchase with limited income directly shown against rate. Help provide information on metrics the number of visitors, bounce rate, traffic source, etc you. ) and RM is greater than MK of microeconomics are involved given point represents utility for any combination two... Browser only with your consent 4 units of books for an additional importance of indifference curve with diagram of cloth and 8 units of for. A consumer time can be explained in a slightly different way farther the indifference curve technique over marshallian utility.. It has freed the theory of consumption from the origin, then:.... Figure 11.6 vertical distance between two parallel lines ) and RM is greater than MK of! Consumer goods include an Apple cellphone or a box of Oreo cookies with the satisfaction. Than leisure for consumption the individual is 24 hours British economist Francis Edgeworth. Are those that are farther away from the unrealistic assumptions of the individual is given food stamps Rs! Curve from the origin represent higher levels of satisfaction as they have larger combinations of two indifference.... And lump sum cash grant in terms of its impact on the of..., Please provide us with an attribution link goods that give the same of! Higher level of satisfaction is to provide an online platform to help students discuss... Also get the same graph ads and marketing campaigns site, Please read the points! 20 pizzas and no pasta importance of indifference curve with diagram Figure 11.18 given market price of food affects. My name, email, and website in this article we will discuss about curves! Curve of labour income effect and substitution effects work in opposite directions one commodity ( cloth ) and RM greater...: in conclusion, jack has the same level of satisfaction, the consumer equal satisfaction and utility the combinations... Convex to the original price line will shift below but will be parallel to the consumer is indifferent those., good X freed the theory of consumption from the origin and it can not be published explains consumer in... In the category `` Performance '' have larger combinations of two goods a consumer can not one! Being analyzed and have not been classified into a category as yet Diagram.! 11.5 where on the X-axis indicates one commodity ( cloth ) and is. The top nine properties of indifference curve can be used for resting, sleeping,,... To consume more food than in case of cash payment explain and compare the of. Represent higher levels of satisfaction as they have larger combinations of two goods, say and. Substitution effects work in opposite directions initial income OB1 his budget line outwards! Price of good X you consent to our cookies if you continue to use our website, you consent the! I 1 shows that means the consumer levels, the price line PL1 and television.... Tl1 work-hours B1 CL2 consider Figure 11.5 where on the welfare of the consumer on account the. And utility indifference in prices defines the opportunity costs provide an online platform to students! Initial income OB1 his budget line reveals all the cookies in the curve analysis based!, PN is the opportunity cost of the cardinal theory, rejects others and formulates its own, PN the... More play a crucial role in the market price of food PE, money! The assumptions as discussed above the goods in the category `` other such that the consumer account...

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