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Indifference curve analysis - Essay Example

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An indifference curve is a two dimensional graphical representation of all those bundles of two goods which can be combined to give a consumer the same amount of utility which is also maximum utility for combinations of given goods. Here the two axes (horizontal and vertical) of the graph would represent the units of each good and points plotted in the plot area, the various combinations of the two goods combined in consumption situations…
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Indifference curve analysis
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Download file to see previous pages The indifference curve is a particular selection of such combinations of goods, from out of the plot area, and all combinations on an indifference curve represent the fact that the consumer derives the same amount of total utility from consumption. Since utility derived from variously combined two goods on an indifference curve is same; the consumer is said to be indifferent between various combinations of two goods and the curve carrying all such combinations is termed as the indifference curve. Normally, with desirable goods on both axes (say, apples and oranges) the curve has a certain shape, further from the origin when both quantities are positive than when one is zero. (Definition,2006)Convexity to the origin of the indifference curves is explained by the fact that as one consumes more of one good its overall utility diminishes and tendencies to replace it with other increase. An example could illustrate this construct:
It has been stated above that indifference curve carries mostly hypothetical pairs of goods combination ,amongst which the consumer is indifferent.However,the consumer cannot purchase quite a few of these combinations due to two factors. One is the prices of the two goods and the other is his income or budget available for expenditure on these two goods. Budget is an unalterable constraint while prices can be taken care of by moving from one good to the other. Continuing with the example above, suppose each apple was priced at $2 and each orange at $2.5 and given the fact that the consumer had an unalterable budget allocated for purchasing these two goods at $ 50 we observe that the consumer could either purchase 25 apples and no oranges or 20 oranges and no apples in two situations of exhausting the entire budget. However in neither of these situations the consumer maximizes his utility as he is away from his indifference curve despite exhausting his budget. In fact these two points represent the two extremes of the budget line and lie on the horizontal and vertical axes respectively. In the figure below the line formed by joining the points (0, 20) and (25, 0) is the budget line. Budget line forms a triangular area with the two axes. This triangular area is the area of feasible purchases. The budget line, and everything inside it, is called the "feasible set" or the "consumption opportunity set."(Modern,2006).All combinations of apples and oranges plotted in this triangular area can be purchased from out of the given budget. This area is depicted by red lines. All goods combinations falling out of this triangular area cannot be purchased as they would not fit in with the budget constraint. This are is depicted with blue lines.Thus budget line narrows down the choice available to the consumer. In case the consumer increases his budget for the two goods across the board (say consequent to ...Download file to see next pagesRead More
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