Indifference curve
Cloth
An IC shows any combination of two goods
A
That provides consumer an equal satisfaction and utility
and making the consumer indifferent between choosing
B
which combination to choose.
C
Typically, indifference curves are shown convex to the
origin, and no two indifference curves ever intersect.
Beach Ball
The indifference curve is a type of curve which is helpful to graph the utility level obtained from
consuming any type of good. Let suppose in our case there are two Goods, The Cloth and Beach
ball. This red colored IC shows the utility we gain from consuming each unit of Cloth, Beach
ball or combination of both. The points A, B, C show the 3 of unlimited possible combinations or
bundles that can consumed.
It is true that one a single indifference curve the level of utility is same on every point whether A,
B or C, consumption of all provide equal level of utility or satisfaction.
Cloth
When we want to increase the level of utility of number of
utils so we have jump to the upper IC2 (From IC1 to IC2),
A
X
because only the upper IC can provide the higher level of
utility. Until we are on the same level of IC so we will get
same level of utility no matter what combination we choose.
B
IC2
C
To achieve the higher level of utility curve we need to
increase our budget line or to decrease the price of any
commodity or Good.
IC1
Beach Ball
The Budget lines shown by blue dotted lines.
X
Now the concept of MRS goes as Marginal rate of substitution. It is a rate at which we substitute
one good for another (Let say cloth for Beans ball). It means that if we give up one unit of cloth
so how much units of Beans ball we can get extra to consume. In simple language if we say is
that MRS is slope of the IC. We know that IC is non-linear and its slope is not constant at any
point, so we dram a tangent (Iso-cost), or budget line to find the slope of indifferent curve. The
blue dotted line XX can be understood a tangent (Or budget line), that can help us to find the
slope of indifference curve.
The method to find MRS is by the ratio
M.R.S. = Δ Y / Δ X
Which is the ratio of change in Y (Cloth) and change in X (Beach ball).
If we decrease the Quantity of Cloth unit so we can get more of Beans ball units.
Beach ball
Axis rotated to understand
better the change in
consumption of cloth
Now what happens if the production of cloth
increase due to technological progress. Now if the
production has increased as the cloth is in huge
Not drawn to scale
quantity in market, so according to law of demand
the price of cloth will fall.
A
As the price of cloth falls so now we can consume
B
More of cloth. Note that with decrease in price of
IC2
C
IC1
cloth may not effect the consumption of Beans ball,
because the price of only cloth has changed and left more space for
Consumption of it. So with more production of cloth the IC will shift rightward up
Towards the North east part of the graph, and reduction in price of cloth will move the IC more
towards
Cloth.
Cloth