2 Indifference CurvesIndifference 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 or bundle of two goods which yield the same level satisfaction to the consumer so that he is indifferent among these combination.We can say that these bundles of consumption make the consumer equally happy.
3 Shape of Indifference Curve The indifference curves are not likely to be vertical, horizontal, or upward sloping.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 to remain equally happy.
8 Assumptions of Indifference Curve Theory Rationality: it is assumed that consumer is rational _means has full knowledge about market conditions and aware of his costs and benefits.Utility is Ordinal: this theory assumes that consumer can rank all his preferences according to the level of satisfaction without precisely quantifying the utility.Consistency: It is assumed that consumer is consistent in his choice, if in one period he prefers bundle A over B he will never choose B over A in another period if both bundles are available to himTransitivity: consumer choices should be transitive. If bundle A is preferred to B , and b is preferred to , Then bundle A must be preferred to C. Symbolically it meansIf A > B ,and B >C , then A >C
9 Properties of Indifference Curve Higher indifference curves are preferred to lower ones. As higher indifference curve represent larger quantities of goods than the lower onesIndifference curves are downward sloping. If a consumer wants to increase the quantity of one thing he has to reduce the units of other productsIndifference curves are bowed inward. The diminishing marginal rate of substitution causes the indifference curve to bow inward or convex to the origin
10 Indifference curves do not cross 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. (C & B)If we allow that the consumer is indifferent to all points on both curves, then the consumer must not prefer more to less.There is no way to sort this out. The consumer could not do this and remain a rational consumer