What is the meaning of difference curve?
What is the meaning of difference curve?
Key Takeaways. An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
What are the three basic assumptions of indifference approach?
The indifference approach is based on three basic assumptions: the assumption of completeness (or law of comparison), the assumption of consistency (or transi tivity) and the assumption of non-satiation (or non-satiety).
What are the assumptions of indifference curve?
Assumptions of Indifference Curve Analysis: (1) The consumer acts rationally so as to maximise satisfaction. (2) There are two goods X and Y. (3) The consumer possesses complete information about the prices of the goods in the market.
How equilibrium is established with indifference curve analysis?
At tangency point E, the absolute value of the slope of the indifference curve (MRS between X and Y) and that of the budget line (price ratio) are same. Equilibrium cannot be established at any other point as MRSXY > PX/PY at all points to the left of point E and MRSXY < PX/PY at all points to the right of point E.
What do you mean by MRS in economics?
marginal rate of substitution
In economics, the marginal rate of substitution (MRS) is the amount of a good that a consumer is willing to consume compared to another good, as long as the new good is equally satisfying. MRS is used in indifference theory to analyze consumer behavior.
What are the five properties of indifference curve?
Characteristics of Indifference Curves
- Indifference curves slop downward to the right.
- Every indifference curve to the right represents a higher level of satisfaction.
- Indifference curves cannot intersect each other.
- Indifference curve will not touch the axis.
- Indifference curves are convex to the origin.
What are the methods of indifference curve analysis?
The fundamental approach of indifference curve analysis is that it has abandoned the concept of cardinal utility and instead has adopted the concept of ordinal utility.
What is an indifference curve and its properties?
Definition: An indifference curve is a convex shaped curve depicting the graphical representation of the different combinations deriving the same level of satisfaction to the consumer by considering two commodities. It functions on the principle of the diminishing marginal rate of substitution (MRS).
What is equilibrium point in indifference curve?
It means that the consumer’s equilibrium point is the point of tangency of price line and indifference curve. At equilibrium, Slope of indifference curve = Slope of budget or price line or MRSXY=PXPY. Also, at point E, IC2 is convex to the origin. Accordingly, equilibrium is stable.
Where is equilibrium point in indifference curve analysis?
The consumer’s equilibrium under indifference curve analysis is found at the tangent between the budget line and a convex indifference curve.
What are the 5 properties of indifference curve?
The four properties of indifference curves are: (1) indifference curves can never cross, (2) the farther out an indifference curve lies, the higher the utility it indicates, (3) indifference curves always slope downwards, and (4) indifference curves are convex.