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Indifference Curve - Essay Example

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Summary to essay on topic "Indifference Curve"
An indifference curve is a graph representation showing combinations of goods for which a consumer preference/utility is indifferent, that is, it has no preference for one combination versus another. They are used as a device to represent the consumer preferences and applied extensively in choice theory…
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Download file "Indifference Curve" to see previous pages... The list of indifference curves associated with different utility level is called an Indifference Map. The rational consumer prefers the higher or right most, Indifference curve, since they represent combinations of goods providing higher utility levels.
The slope of the indifference curve is called the marginal rate of substitution.
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It is the rate at which consumers are willing to give up one good in exchange for more of the other good. For most goods the marginal rate of substitution is not constant so their indifference curves are curved. Indifference curves are typically assumed to have the following features:
Today's Economy is market driven where customer is the king. The market price is determined by forces of 'Demand and Supply'. To excel in the market, the firms must asses the demand of the customer. Consumer theory uses indifference curves and budget constraints to produce consumer demand curves. A budget constraint shows the consumer's purchase opportunities as every combination of two goods that can be bought at given prices using a given amount of income. Consumer's optimal combination of goods to consume is the amount that maximizes his utility subject to his/her budget constraint. ...Download file "Indifference Curve" to see next pagesRead More
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Unfortunately, Laspeyres does not take an account that as prices rise the consumer will automatically buy less of the purchase or will go for a cheaper product, in both the cases reducing the sales volume of the particular product. As an outcome of this oversight, Laspeyres index methodically overstates price rises.
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While in practice the consumer may go in for a particular combination of the two goods(quite irrespective of the utility derived) the indifference curve carries hypothetical consumption states strictly for analyzing and exhibiting a manner in which consumption decisions are reached.
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Ophelia says,' if i could lend money at the rates i must pay to brrow, i would. And if i could borrow money at the rates i receive when i lend, i would again. But forsooth, alothought i spend, i neither borrow nor lend.'
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