THE HYDERABAD PUBLIC SCHOOL, BEGUMPET

CLASS: 12
SUBJECT: Economics

TOPIC:Indifference curve analysis

PRESENTER: K.S.Sumita
 Indifference Curve
• An Indifference curve shows various combination of two
commodities which gives equal amount of satisfaction to the
consumer.

Combination Food Clothing Marginal rate of substitution

A 1 10 _

B 2 7 3:1

C 3 5 2;1

D 4 4 1:1
Indifference curve
INDIFFERENCE CURVE SCHEDULE-2

combination food clothing MRS of food for

clothing

1 15
a

2 11 4:1
b

3 8 3:1
c

4 6 2:1
d

5 5 1:1
e
comb food clothing MRS it is amt of one unit
giving for other

A 1 25

B 2 20 1:5

C 3 16 1:4

D 4 13 1:3

E 5 11 1:2

F 6 10 1:1
 Indifference Map 2m

• It is a group or set of indifference curve, each of which represents a given

level of satisfaction.
• Higher the Indifference curve higher the level of satisfaction.
 Marginal rate of substitution

• It is the rate at which, the consumer is willing to substitute one good

for another, without changing the level of satisfaction.
• It is defined as, Amount of “Y” the consumer is willing to give up to
get additional unit of “X”, so that same level of satisfaction is
maintained.
• Mrxy = Loss of Y = Delta Y
Gain of X Delta X
What is MRS .Explain with the help of schedule and graph.
Dimnishing Marginal rate of substitution

Combination Grapes oramge MRS

A 1 20 _

B 2 12 8:1

C 3 8 4:1

D 4 5 3:1
Dimnishing Marginal Rate of substitution
Assumptions of Indifference Curve (Explain two
assumptions of Indifference curve)
• Rationality- Consumer is neither a miser(over expects ) or a
spendthrift (not bothered).He is a ordinary person who wants to
maximise satisfaction.
• Ordinal Utility- where utility cannot measured but it ordered/ranked
according to preference
• Non- satiety -It is assumed that the consumer has not reached point
of saturation.He always tries to move to higher indifference curve
• Transitivity of Choice-when a consumer prefers A to B and B to c then,
he always prefer A to c
• Diminishing Marginal rate of substitution- Due to this assumption
Indifference curve is convex to origin
Properties of Indifference Curve
• An Indifference curve slopes downwards from left to right.
• if a consumer wants to have more of commodity X he has to give some
commodity of y to be at same level of satisfaction. plotting a graph of
more of one unit by consuming less of other unit gives downward
sloping curve
• An Indifference curve is convex to the origin - Diminishing marginal rate
of substitution
• Higher the Indifference curve, higher is the level of satisfaction.
 Two Indifference curves never intersect each other.
let two indifference curves IC1 and IC2 ,intersect each other at
point B.Bundles A and b lies on IC2 and D and B lies on
lower IC2.by transitivity bundles D and A should provide
same level of satisfaction. Bundle A is greater than bundel
D.hence indifference can never intersect each other.
 Budget line

• A budget line shows various combinations of two commodities

which can be purchased with a given budget at given price of the
two commodities.
• Eg : Let us assume a consumer has 200 rupees and he need to
spend money on food and clothing. The price of food is 20 and the
same for clothing is 40. How much of food and clothing can a
consumer buy?
• Explain Budget line with the help of Example?
 Combination of clothing and food

Unit of clothing Unit of food Expenditure

5 0 (5 x 40) + (0 x 20) = 200

4 2 (4 x 40) + (2 x 20) = 200

3 4 (3 x 40) + (4 x 20) = 200

2 6 (2 x 40) + (6 x 20) = 200

1 8 (1 x 40) + (8 x 20) = 200

0 10 (0 x 40) + (10 x 20) = 200

Budget Line

P1 X1+ P2X2 =Y, P1 = price of commodity x ,X1= quanti

P2= Price of commodity Y, X2= Quantity of commodity
Example for budget line
let us assume a person has 60 rs.price of good x is 2 and price of good y
1.
units of goodX units of good y Expenditure

0 60 0x2 +60 x1 =60

10 40 10x2 +40x1 =60

20 20 20x2+ 20x1 = 60

30 0 30x2 + 0x1 =60

consumers income is rs 120 .price of good x is 2 and price of good y 1

Consumers equilibrium through indifference curve approach
slope of budget line is equal to slope of indifference curve.
slope of straight line budget line = y2-y1 = Py
x2- X! Py
slope of Indifference curve= = MRSxy
The point where budget line is tangent to Indifference cuve is called as consumers equilibrium
 Conditions of Equilibrium

• MRS = Price Ratio of two goods

• MRSxy = Py
Px